Village savings and loans: A pathway to financial inclusion for Africa's poorest households

Abstract

For Africa's poorest and most marginalized households, few financial institutions exist to serve them, and where institutions do exist they generally have inappropriate products and services. To address the issue of financial inclusion and reach poorer clients, CARE began promoting a savings-led microfinance model, called Village Savings and Loans Associations (VSLAs). The VSLA model is based on the belief that for the extremely poor, particularly women, the best approach is to begin by building their financial assets and skills through savings rather than debt. Through participation in a VSLA members can diversify their activities, plant additional crops and even add new income generating activities. At the same time, they are able to save and borrow in ways that allow them to smooth cyclical household consumption patterns. Now more than ever before, we see VSLAs as an important, and often necessary, rung on the ladder of financial inclusion. Article Full financial inclusion is generally referred to as a state in which all people have access to a full suite of financial services, including most fundamentally savings, credit, insurance and transaction accounts, but extending as well to more sophisticated financial instruments such as pensions and lines of credit. Ideally these services would be provided by a range of providers to ensure users receive services at competitive rates. For Africa's poorest and most marginalized households, financial inclusion is a long way off. Few institutions exist in the rural areas, and where institutions do exist they often have inappropriate products and services. The reality is most extremely poor households have neither the assets nor the skills to interact with formal institution, even those dedicated to reaching the poor. This paper looks at baseline data collected as part of an ongoing impact assessment across three countries implementing large scale Village Savings and Loan (VSL) programs: Malawi, Tanzania and Uganda. The baseline data provides evidence of the poverty levels of target communities, and identifies the needs for and barriers to formal financial inclusion in poor remote communities. When combined with periodic data collected on

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