Informal group finance

People have been solving their money management problems in diverse ways for a long time. They have invented a variety of solutions to saving and borrowing that do not fall into the sphere of regulated formal institutions and these are known as informal financial service mechanisms. They include savings clubs that people run themselves, savings clubs that are managed by other people, e.g. religious or welfare organisations or paid commercial managers, and informal providers such as money lenders, pawnbrokers or deposit takers. Informal mechanisms are still the most important in many poor communities and development workers would do well not to dismiss them as inappropriate or exploitative as they are often vital to people’s livelihood strategies.

Promoting self help groups to overcome the lack of access to formal financial services is now a very common development strategy. They may function as small village “banks” in their own right or provide a guarantee system for members to borrow from other institutions. The SHG bank linkage model in India has become world famous and the Village Savings and Loan Associations, initially promoted by CARE in Africa, have become widespread. Another model, initially promoted by FINCA, is known as Village Banking. Many self help groups remain small and informal; some create federations which become legal entities and thus move on to become formal member-owned institutions. Some donor interventions lead to the creation of community-managed loan funds, although it is rarely clear if these are meant to be temporary or permanent structures.

Library Resources

resource title type year resource
Informal Finance in Sierra Leone: Why and How It Fits Into the Financial System Paper 2018

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What factors account for the prevalence of informal finance?

This paper investigates why in Sierra Leone the informal financial sector continues to exist alongside the formal financial system, despite the implementation of financial sector reforms. One of the main policy objectives of the expansion of formal finance in developing countries is to curtail the use of informal finance because of the associated downsides of its use. However, a number of studies have found that large informal financial sectors still exist in sub-Saharan African economies.

Cognizant of the existing theories of informal finance, this paper seeks to examine the context-specific reasons for the continued relevance and use of informal finance in Sierra Leone. The paper finds a number of factors account for the prevalence of informal finance in Sierra Leone including; historical and social factors, external factors beyond policymakers' control, and problems with government and donor efforts to promote rural banking and the expansion of the microfinance sector. Perhaps most thought-provoking is that a degree of interdependence exists between formal and informal finance as they both feed off each other, a finding which has implications for policies aimed at curbing the use of informal finance.

A country assessment of community- based financial institutions in Eastern and Southern Africa Paper 2014 English (en)

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The focus of this paper is on six countries: Lesotho, Malawi, Mozambique, Uganda, Tanzania and Zambia. Attention has also been given to other programmes promoting similar models of time-bound savings groups.Each of these countries offers unique insights on particular aspects of the informal financial sector and savings groups practices. The paper covers the origins and context of the informal financial sector in the African continent. It also examines the operational  features of existing SGs through different models. It further highlights the state of financial  inclusion, with particular focus on FinScope surveys in the countries assessed. Although at different levels, these surveys reveal that there are common challenges in promoting  financial inclusion among rural households in sub-Saharan African countries.

Among its findings, the review highlights the critical role mobile money platforms play in  enhancing financial inclusion in Africa in areas where the formal financial sector is not  able to reach due to infrastructural and operational challenges.

The paper provides six recommendations:

  1. Linking CBFIs (SGs) to the formal financial sector requires that some factors be fulfilled.
  2. Aggregating CBFIs (SGs) so that they can access better services and effective market linkages
  3. The need for formal financial institutions to understand the informal financial  sector in order to better design products with features that add value to the users of informal financial services
  4. Enhancing the mobile money infrastructure to expand financial inclusion among the unbanked
  5. Establishing and supporting meso-level structures such as SaveNET in Zambia and the ASCA forum in Mozambique
  6. Linking the informal financial sector with other government and NGO programmes that provide additional financial and non-financial services such as adult literacy programmes.

 

A country assessment of community- based financial institutions in Eastern and Southern Africa  -  English (en)

Author Rural Finance Knowledge Management Partnership (KMP)
Publisher Rural Finance Knowledge Management Partnership (KMP)
Nairobi, Kenya
Number of Pages 56 pp.
Primary Language English (en)
Region / Country Global, Africa, Eastern and Central Africa, Southern Africa
Keywords Access To Finance, Community Financial Institutions, Rural Finance
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Community - based financial organizations: Inclusive rural financial services Paper 2014 English (en)

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Formal banks are not interested in servicing remote rural areas due to a lack in economies of scale, high transaction costs and a perception that the rural poor are not a viable target market. Community-based financial organizations (CBFOs) are often the only institutions available to provide basic financial services to the rural poor, especially in areas where basic infrastructure is lacking.

 

The term ‘community-based financial organization‘(CBFO) covers a wide variety of entities that provide a range of financial products and services. CBFOs typically operate in remote areas that lack access to the formal financial services, and often without government regulation and oversight. Most CBFOs are self-governing, of ten relying on volunteers. These basic features allow CBFOs to play a powerful role in empowering women and helping isolated communities to access public services

Community - based financial organizations: Inclusive rural financial services  -  English (en)

Author International Fund for Agricultural Development (IFAD)
Publisher International Fund for Agricultural Development (IFAD)
Rome, Italy
Number of Pages 4 pp.
Primary Language English (en)
Region / Country Global
Keywords Self-Help Groups, Access To Finance, Community Based Finance, Community Based Organisations
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How to support community - based financial organizations Paper 2014 English (en)

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One of the main tools to alleviate poverty is creating access to financial services for people who are currently excluded from the financial system. However, it remains a major challenge to successfully create access in these areas on a financially sustainable basis. In many countries, the formal banks are not interested in servicing remote rural areas due to: (i) a lack of economies of scale; (ii) high transaction costs; and (iii) a perception that the poor are not creditworthy. Community-based financial organizations (CBFOs) are often the only institutions available to provide basic financial services to the rural poor, especially in remote areas with inadequate infrastructure.

The purpose of this publication is to provide information on how CBFOs and support structures might best serve remote rural communities, identifying the basic success factors required and the potential challenges to be overcome. It looks at creating effective interventions and the use of key performance indicators (KPIs).

How to support community - based financial organizations  -  English (en)

Author International Fund for Agricultural Development (IFAD)
Publisher International Fund for Agricultural Development (IFAD)
Rome, Italy
Number of Pages 24 pp.
Primary Language English (en)
Region / Country Global, Africa
Keywords Access To Finance, Community Based Organisations, Community Based Finance
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A Case Study of Rural Finance Self-Help Groups in Uganda and Their Impact on Poverty Alleviation and Development Case Study 2013 English (en)

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The intent of this research is to study the impact of financial Self Help Groups (SHGs) on poverty alleviation in Uganda. Specifically, the intent is to focus on rural poverty and the poverty of women. Additionally, this research is intended to study the impact of SHGs on the development of their communities, both material and non-material development. It focuses specifically on the development of women. This research also focuses on documenting the successes of SHGs and the limitations and challenges they face and on making recommendations that will improve their effectiveness. The SHGs studied are under the Self Help Group Approach Uganda (SHGAU) organization.  This research was conducted in Kampala, Uganda and Masuliita, Uganda.

The main findings of the research supported the claim that SHGs are very successful in alleviating poverty in rural areas and increasing human development, especially among women. The limitations the groups faced were not so much with the groups themselves, although there may be a few very minor structural problems with the groups, but with outside forces, mostly cultural and economic. Specifically, the Ugandan cultural views of women and the poor economic market situation in Uganda hindered the impact of the groups. Recommendations, therefore, focus mainly on social equality and on a stronger economy that will make it easier for these groups to succeed and facilitate even more poverty alleviation and development.

A Case Study of Rural Finance Self-Help Groups in Uganda and Their Impact on Poverty Alleviation and Development  -  English (en)

Author Rebecca Flynn
Publisher SIT Graduate Institute
Number of Pages 49 pp.
Primary Language English (en)
Region / Country Global, Africa
Uganda
Keywords Informal Finance, Self Help Groups, Access To Finance
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Longer-Term Economic Impacts of Self-Help Groups in India Paper 2009

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Despite the popularity and unique nature of women's self-help groups in India, evidence of their economic impacts is scant. Based on two rounds of a 2,400 household panel, the authors use double differences, propensity score matching, and pipeline comparison to assess economic impacts of longer (2.5-3 years) exposure of a program that promoted and strengthened self-help programs in Andhra Pradesh in India. The analysis finds that longer program exposure has positive impacts on consumption, nutritional intake, and asset accumulation. Investigating heterogeneity of the impacts suggests that even the poorest households were able to benefit from the program. Furthermore, overall benefits would exceed program cost by a significant margin even under conservative assumptions.

Author Deininger, K; Liu, Y.
Publisher The World Bank
Number of Pages 31 pp.
Primary Language English (en)
Region / Country Global
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The Intricacies of ROSCAs and ASCAs: should donors promote them? Editors Note 2008

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Ahmad Jazayeri explores the working of Rotating Savings and Credit Associations (ROSCAs) and Accumulative Savings and Credit Associations (ASCAs), providing a good summary of these informal mechanisms and why people join them. He notes that ASCA type arrangements are being supported by various aid programs as low cost outreach mechanisms in remote areas and questions whether it is enough to just promote such groups and provide minimal training and let the community and group do the rest.

Author Jazayeri, A.
Region / Country Global
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Primary Agricultural Credit Society Linkage, India: The Best Remote Rural Self-Help Groups Can Do? Case Study 2008

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This case examines a linkage between two member-owned institutions: Thrift and credit associations called Self-Help Groups (SHGs), and government-promoted credit cooperatives called Primary Agriculture Credit Societies (PACS). This linkage extends the already rural cooperatives broader and deeper by bringing in a massive network of rural women’s groups. When combined with the grid of institutions like the cooperative system, the model has the potential to reach virtually every village in India.

Author Rewa Misra
Publisher COADY / Ford Foundation
Number of Pages 28 pp.
Primary Language English (en)
Region / Country Global
India
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Case of Self-Help Group (SHG) and Mutually Aided Cooperative Societies (MACS) – Does Federating Enable Remote Outreach? Case Study 2008

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This case examines a sub-district level federation of Self-Help Groups (SHGs) that grew out of a local trade union and Dalit (‘Dappu’ Dalitbahujan) movement. It is a three-tier system, Ankuram Sangamam Poram (ASP), a federation of SHG federations with nearly 6,000 SHG groups at its base. Also, The case demonstrates ASP’s ability to reach the unreached in large numbers. The federation absorbs the initial risks and costs associated with outreach in remote areas and to marginalized communities. However, now that they are facing competition from new entrants, they will thrive only if their systems and governance successfully meet the challenges of being a ‘business first’ and demonstrate clear gains for member-owners. The case shows that member-ownership is not enough to ensure loyalty from the lowest-tier clients, mandal, Mutually Aided Cooperative Societies (MACS) and SHGs, if inputs and services are not adequate.

Author Rewa Misra
Publisher Coady / Ford Foundation
Number of Pages 23 pp.
Primary Language English (en)
Region / Country Global
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Village Savings and Loans Associations in Niger: Mata Masu Dubara Model of Remote Outreach Case Study 2008

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This case study examines 25 VSLAs in the Tahoua region of Niger, both networked and non-networked. The case examines important trade-offs facing smaller MOIs, particularly decentralized associations. Under what circumstances is simpler better? What is gained by networking and linking? What is lost? What are the trade-offs between cashing out and accumulating? Between a financial and an integrated model?

Author Alfred Hamadziripi
Publisher COADY/Ford Foundation
Number of Pages 32 pp.
Primary Language English (en)
Region / Country Global
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Muntigunung Lembaga Perkreditan Desa, Indonesia: Village Ownership as a Model for Remote Outreach of Financial Services Case Study 2008

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Lembaga Perkreditan Desas (LPDs), village-based financial institutions in Bali, Indonesia present an interesting model for remote outreach. This village-based model has the potential to broaden access to rural, remote areas by making use of existing local governance structures. Because the LPD is owned and governed by the customary village council it means that nearly every village on the island has, at least, access to financial services.

The LPD system has many innovative elements—a supervisory design that allows for cost recovery, an incentive structure for staff tied to performance, community ownership and the use of local customary laws for credit control. However, the LPD case also highlights the risks of MOIs being too locally oriented, especially regarding internal governance, without effective external regulation and supervision to counterbalance the influence of traditional power structures.

Author Rewa Misra
Publisher Coady / Ford Foundation
Number of Pages 25 pp.
Primary Language English (en)
Region / Country Global
Indonesia
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The Mutuelle Communautaire de Croissance (MC2s), Cameroon: Decentralized Community Banks for Remote Outreach Case Study 2008

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This case study examines two Mutuelle Communautaire de Croissances (MC2s). Njinikom MC2 is in a competitive financial market with established cooperatives yet has managed to generate a profit for each of the last three years with subsidies from a private Bank. Bambalang MC2, the only formal institution in its area and with a larger membership than Njinikom has, under operating subsidies, seen losses in each of the last three years. Long term success will depend on the successful exiting of MC2s from these subsidies.

Author Dr. Djoum Kouomou Serge
Publisher Coady / Ford Foundation
Number of Pages 31 pp.
Primary Language English (en)
Region / Country Global
Cameroon
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FISE tool - A Quadruple bottomline MFI Branch rating tool Paper 2007

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MFIs in its thrust towards reaching the financial sustainability forgets its social objectives and get criticized in the media and political circles. Now, rating is practiced for MFI as a whole and these reports do not reach the branch people. To internalize the concept of rating among the staff of MFI branches, FISE tool has been developed using 16 parameters representing Financial, Institutional, Social and Environmental performance indicators. Use of FISE tool by the branch will equip them to take forward the MFI branch to bring out a holistic development among the target group. The tool has been made as simple so the non technical staff at the branch also can use the tool.

Author Jeyaseelan, N.
Primary Language English (en)
Region / Country Global
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Village Savings and Loan Associations Editors Note 2007 English (en)

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This Editor's Note highlights a debate in DevFinance which led to a very clear exposition by Hugh Allen about the nature of Village Savings and Loan Associations (VSLAs) and how they differ from more indigenous savings mechanisms such as ROSCAs and ASCAs. Dale Adams provoked the discussion by questioning whether the promotion of VSLAs was really necessary and noting their deficiencies. If you have such doubts this Note will provide some of the answers.

Village Savings and Loan Associations  -  English (en)

Author Allen, H. and Adams, D.
Region / Country Global
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Community-based Financial Organizations: A Solution to Access in Remote Rural Areas? Paper 2007 English (en)

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This paper reviews the evidence to date on the sustainability of CBFOs, with a view toward determining whether they are a viable option for the provision

of financial services to the rural poor who live in sparsely populated rural areas. CBFOs can be defined as autonomous organizations owned and

managed by members of a particular community. They differ from the “village banks” in Latin America and the “solidarity groups” in countries such as

Bangladesh in that such groups are usually not autonomous; they have been set up by MFIs as a cost-effective way to provide services to the poor.The objective of the paper is to provide claritys on whether, and how, such entities can be part of a strategy for the economic development of the poor living in rural areas who are not
well-served by financial institutions.

Community-based Financial Organizations: A Solution to Access in Remote Rural Areas?  -  English (en)

Author Anne Ritchie
Publisher The World Bank Group
Washington, DC.
Number of Pages 70 pp.
Primary Language English (en)
Region / Country Global, Africa
Keywords Access To Finance, Self Help Groups, Community Based Organisations
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Village Savings and Loan Associations Document 2006

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The Village Savings and Loan (VS&L) model is a savings-based approach that has proven on a significant scale that it can substantially fill the gap between the needs of the poor for financial services and the ability of banks and MFIs to provide these services. It provides sustainable and profitable savings, insurance and credit services to people who live in places where banks and MFIs do not have a presence such as rural areas and urban slums.

The model was originally developed by CARE in Maradi, Niger, in 1991 and has spread to 17 countries in Africa, 2 in Latin America and 2 in Asia, with over 1.25 million participants. A VS&LA is a self-selected group of people, (usually unregistered) who pool their money into a fund from which members can borrow. The money is paid back with interest, causing the fund to grow. The regular savings contributions to the group are deposited with an end date in mind for distribution of all or part of the total funds (including interest earnings) to the individual members, usually on the basis of a formula that links payout to the amount saved. This lump sum distribution provides a large amount of money that each member can then apply to his/her own needs.

This training guide describes the VS&L methodology and then provides detailed instructions on how to initiate and provide the training that groups will need. It covers group leadership, elections, developing policies and a constitution, record-keeping and procedures for managing meetings. The manual includes examples of stories and games that can be used in the training process and examples of all the forms that are required. A management information system for field officers involved in promoting the groups is provided in an accompanying spreadsheet.

This is a highly practical and useful guide which promotes a methodology that deserves the widest application and use in rural areas of Africa and elsewhere. The guide and the spreadsheet are downloadable from the RFLC and can also be downloaded from the VSLA website. You should regularly check the VSLA site for updates and new releases.

Author Allen, H.; Staehle, M.
Publisher VSL Associates
Number of Pages 140 pp.
Primary Language English (en)
Region / Country Global
Keywords Savings And Credit Association, Self Help Group, Village Bank
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Village Savings and Loan Associations: experience from Zanzibar Report 2006

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This paper describes Village Savings and Loan Associations (VSLA) as a time-bound accumulating savings and credit association (ASCA). In it, 15 to 30 people save regularly and borrow from the group fund. Loans are repaid with interest, and have a period usually between one and three months. On a date chosen by the members, usually after about a year, all the financial assets are divided amongst the members in proportion to each one’s savings. This payout is called the “action audit”. The groups normally reform immediately and start a new cycle of savings ad lending.

The VSLA methodology proposes that once mature, groups can function with no external support. Its proponents suggest that in the best programmes, 95% of the groups continue to function after two years and that the model reaches deeper into rural areas and serves poorer people than other microfinance models. The objective of this study was to examine the performance of VSLA groups in Zanzibar after several years of operation independent of CARE or other non-governmental organisations (NGOs). It also sought to understand the outreach of the programme to poorer members of the community, and its ability to provide useful services and produce change in the lives of users.

The objective is formulated into five key research questions around which the results are presented:

  1. To investigate the performance of VSLAs in terms of both outreach and sustainability in the period since CARE stopped training the groups and turned that function over to the local organisation, covering both numbers of clients and indicators of groups’ financial performance, including loan and savings volumes, arrears and default.
  2. To investigate the role of village trainers as support service providers in ongoing support to groups and expansion of the VSLA model.
  3. To investigate the poverty outreach of the VSLAs in terms of both client poverty levels and location in the context of the social and economic context of Zanzibar and availability of services from other microfinance providers.
  4. To investigate the usefulness of the financial services provided by the groups to the livelihoods of the members, and the role the savings and loans play in supporting the livelihoods of their users.
  5. To investigate through qualitative research the experience of the groups and their members in relation to internal group dynamics and how these have operated over time.
Author Anyango, E, Esipisu, E, Opoku, L, Johnson, S, Malkamaki, M, and Musoke, C
Publisher Decentralised Financial Services
Number of Pages 80 pp.
Primary Language English (en)
Region / Country Global
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Community-Managed Loan Funds: Which ones work? Article 2006

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Recently some donors have been moving from funding projects that involve microfinance institutions and staff to others which are based on the management and ownership of the community. Community-managed loan funds (CMLFs) are still the minority of donor-fund projects, but this model is increasing in number.

CMLFs are schemes of loan funds in which credit for the members of a small group is managed by the members themselves, with no professional management or supervision of the approval, disbursement, and collection of loans. There are several names referring to these kind of funds such as, village banks, accumulating credit and savings associations (ASCAS) and community-based finance.

This article presents the outcome of a review of the performance of several CMLF projects established or supported by donors and international NGOs over the past 15 years. It highlights that success is very much related to the source of funding for the loans group members receive. Therefore, there are three classifications for these kind of funds:

  • Externally funded groups.
  • Savings-based groups.
  • Self-help groups.

The review showed that of these three models, only the savings-based and the SHG models appear to be viable. However, another factor which helps build success is the quality of external support community groups receive. Such support is important on a continuing basis, not just at the inception of the groups.

The article starts describing the study’s methodology, including sources and criteria for evaluating CMLFs. Then it reviews the performance of the three types of CMLFs, addresses whether CMLFs need long-term external support, and reviews the debate over the relative merits of community-managed and professionally managed approaches. It concludes with a brief summary of the implications for development agencies that support CMLFs.

Author Murray J. , Rosenberg R.
Publisher CGAP
Number of Pages 16 pp.
Primary Language English (en)
Region / Country Global
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SHG Banking in India: the developing world’s largest and fastest-growing microfinance program Editors Note 2005

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SHG banking, or linking banks and self-help groups, in India is the largest and fastest-growing microfinance programme in the developing world. In this Editor's Note, Hans Deiter Seibel reviews the factors that have led to this success and underlines the importance of the social, human and financial capital that made it all possible.

He explains how the SHG bank linkage programme has resulted in positive impacts at all levels from individual clients to local institutional development and changing policies. However, he concludes with a look at the challenges that remain in terms of reaching the remaining 150 million rural poor in India and of achieving long run sustainable access to financial services for participants in the programme.

Author Seibel, H.D.
Region / Country Global
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Sanduq: A Microfinance Innovation in Syria Driven by Shareholder Value Article 2005

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Jabal al-Hoss is one of the poorest areas in Syria where UNDP has supported the establishment of self-reliant local financial institutions, sanduq (sg.) lit. savings box: a novel concept in centralized banking system. The sanadiq (pl.) are self-managed and autonomous in their decision-making, which has included the adoption of financial practices consistent with local values. The start-up is self-financed through member share capital, from which small loans are given for up to three months. Whenever initial financial intermediation is satisfactory, UNDP provides an additional capital injection, thereby increasing outreach, loan sizes and loan periods.

Between September 2000 and December 2002, 22 sanadiq were established, comprising 4,691 members, with shareholder equity of US$ 130,000. UNDP contributed $370,000 in equity. The repayment rate as of 31 December 2002 was 99.7%. Return on average equity was 17%, almost half of which (46%) was paid to shareholders, the balance (54%) retained as capital. Loans permit farmers to bypass trader-moneylenders and sell their produce at a higher price; laborers turn into farmers; and microentrepreneurs use quick-turnover repeat loans for new investments and rapid business growth.

During 2003 growth continued according to a recent UNCEF evaluation: to 30 sanadiq with 6,468 shareholders and a share capital of SP 10.65 million. Loans outstanding grew to SP 63.8 million; portfolio at risk >30 days was a mere 1.3%. At annual dividends between 30% and 40% of paid-in-capital, membership was very attractive.

Special attention is given to women who constitute 41% of the membership, most of them illiterate. They opted for integrated sanadiq, in which female members participate in management committees. They find access to loans easy, as sanadiq do not require physical collateral. Loans are used by younger and older women to do business of their own, eg, fattening sheep, raising cows, opening small shops and renting land to plant cash crops. The additional income is used for business growth and family support. It is not rare that women – many with large families – are the better entrepreneurs, focusing on high-yielding activities outside traditional agriculture.

In 2002 first steps were taken towards the establishment of a network which will provide apex services and initiate the dialog on a legal framework; and of a central fund (Sanduq Markazi) supervised by the Central Auditing Agency. During phase II, 2003-2007, with support from the Japanese Government and UNDP, the focus is now on the expansion and legal consolidation of the network of sanadiq. There are also plans for extending such networks throughout Syria as a strategy for rural development, poverty alleviation and employment generation.

This paper was first published in September, 2003 by NENARACA. It is available in Arabic by email.

Author Imady, O.; Seibel, H.D.
Publisher NENARACA
Number of Pages 12 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Sustainability of Microfinance Self Help Groups in India: Would Federating Help? Paper 2005

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This study from the World Bank, looks at Indian Self-Help Groups (SHGs), unregistered groups of 10 to 20 members involved principally in savings and credit activities. Members save periodically in the group and the savings are lent out to members who require loans at a fixed rate of interest. SHGs differ from other Accumulated Savings and Credit Associations (ASCAs) in that they are usually small, promoted among the poor by external agencies, and can obtain loans from banks. 90 percent of these groups in India are composed of only women members. This study looks at the success of SHGs in India, and considers the challenges they face, focusing particularly on the idea of federating groups to make larger units capable of providing more services to members. It is a useful theoretical study which will be of interest to policy-makers. It should be borne in mind that the three federations looked at in this study are not representative of all federations, but are best cases. The overall objective is to explore the potential of SHG federations in making SHGs financially and organisationally sustainable, and to recommend strategies to strengthen them.

From 1995 to 2005, more than 700,000 SHGs obtained approximately 20 billion rupees in loans from banks under a program of the National Bank of Agriculture and Rural Development (NABARD). In cumulative terms this means that perhaps over 10 million people have benefited from such loans. The on-time repayment rate has been over 95 percent, and a conservative estimate sets savings in SHGs at at least Rs.8 billion. Despite this success story, the sustainability of SHGs is not clear. The small size of such groups means they tend to be dependent on the promoter agencies for several essential services, and in response to this weakness, SHG federations came into being, to take over those services. Such services, provided by federations (including financial services, but also publicity and literacy training of staff), help the SHGs gain economies of scale, obtain value-added services, reduce transaction costs and enhance empowerment, thus contributing to the overall sustainability of the SHGs. Thus the federations may serve to assist SHGs on the way to independence from promoter agencies.

The author argues, using examples of SHG federations, that financial sustainability for such federations is easier to achieve than is organisational sustainability, i.e. effective governance, staffing, and information systems. A system of mutual accountability between member SHGs and their federations is suggested as a solution. The paper is open about its limitations and about its pro-federation argument, and suggests further reading.

Author Nair, A.
Publisher The World Bank
Number of Pages 46 pp.
Primary Language English (en)
Region / Country Global
Related Resources
A Tale of Four Village Banking Programs Book 2004

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Village Banking (VB) has proven to be one of the best practices in micro-finance for rural areas, not only in terms of its assistance to the rural poor, but also in terms of sustainability. A study carried out by the Inter American Development Bank (IADB) in Latin America in 2004 confirms this. This publication summarises the results of this study, compiling best practices in village banking through the analysis of four case studies in Nicaragua, Mexico and Bolivia.

Village banking was introduced in Bolivia in the 1980s as a very rigid model. It involved fixed loan terms and initial loan sizes, mandatory weekly repayment meetings, working capital loans only, forced savings at a prescribed pace, no interest on savings, no access to savings for clients who remained in the village bank and graduation of the entire village bank after three years. Since that time many of these rigid characteristics have been relaxed as village banking institutions have increased their drive towards greater sustainability and scale while maintaining their focus on poverty.

Although village banking has relaxed many of its original rigidities, it still has not gone far enough. This paper examines each major element of the village banking technology and how it has been liberalised so far. It then analyses how this liberalisation process may be usefully carried forward in the future and makes numerous recommendations relating to practice and policy to achieve this.

The final chapter examines the role of non-banking services in village banking and suggests that providing such services is not incompatible with financial sustainability. It also concludes that governments and donors looking to strengthen rural financial systems should consider the village banking model very seriously. Although village banks may not overtly give credit for farming, CRECER in Bolivia estimates that 40% of its clients engage in at least some agricultural activities and that 20-30% engage exclusively in these activities. Hence village banks do reach farm families.

Author Westley, G.D.
Publisher Inter-American Development Bank
Number of Pages 87 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Inequity in Self Help Groups – a view from India’s centre Paper 2004

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The self help group (SHG) methodology has evolved as a very effective microfinance delivery system in India. However, it is still far from meeting the needs of all India’s poor. This paper sets out to examine the continuing issue of inequity in the SHG programme – inequity between states, within states, within communities and within groups themselves. At state level it is clear that there is a considerable disparity in the extent to which the SHG movement has developed. The evidence suggests that poorer states are less successful in terms of SHG coverage. This can be related to the existence of poorer health, education, governance and infrastructure in these states as well.

Field studies were carried out in Jabalpur district in Madhya Pradesh to explore the question of inequity in more detail. Madhya Pradesh is one of the least successful states in terms of SHG coverage and Jabalpur district is the least successful district. Following interviews with the District Central Cooperative Bank, a number of Primary Agricultural Cooperative Societies (PACS), Regional Rural Banks (RRB) and SHG Promotion Institutions, the authors note a variety of problems including complicated bank procedures, a lack of information, a lack of coordination between agencies, a lack of effective SHG facilitators and a lack of profitable investment opportunities for group members.

The study draws on a variety of sources to assess the issue of inequity within SHGs. The result is inconclusive but with sufficient evidence to suggest that in many groups the better off do take more advantage of membership than the poorest. It is the same tendency that Marx noted – the rich generally get richer and the poor poorer. Suggested solutions to the issue of inequity include much greater initiative being shown by RRB staff to promote and work with groups not as a charitable exercise but because it is good business. Cooperative staff could benefit from opportunities to visit successful societies elsewhere and learn from their experience. At national level, the National Bank for Agriculture and Rural Development (NABARD) could proactively target areas with low SHG penetration for an increase in promotional resources and staff. Overcoming inequity is a matter of institutional will.

Author Harper, M.; Nath, M.
Number of Pages 13 pp.
Primary Language English (en)
Region / Country Global
India
Related Resources
A Handbook on Forming Self-Help Groups (SHGs) Guideline 2003

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This resource appears in: Informal group finance

This handbook has been prepared for local animators or group promoters for helping the poor to form self-help groups (SHGs) that can be linked to a local bank. It has been written by the National Bank for Agriculture and Rural Development in India and is thus particularly focused on the Indian context. However, it provides excellent advice for the creation and function of SHGs, which can be applied in any environment where the establishment of SHGs are legally and culturally appropriate.

All self-help groups are based on the fundamental principles of “helping each other” and “unity is strength”. You can use this handbook to develop questions to ask potential SHG members in order to gain a sense of the feasibility of establishing a SHG in the area; and the methods to use in promoting SHGs. The handbook will help you assist the members in defining the division of responsibilities within their SHG. It will also help you to explain the purposes and different types of books that an SHG must learn to keep. Example pages from savings and loan account registers and a cash book are provided in an annex.

The handbook also guides the process of linking an SHG to a bank and divides it into 4 steps:

  1. The opening of a bank account. The SHG presents the bank with a resolution stating its intent to open a bank account, the authorisation of at least three members to jointly operate upon their account, and a copy of the rules and regulations of the SHG if available.
  2. Internal lending. The handbook stresses how it is important for the SHG to practice internal lending before opening a bank account, as it is through internal lending that the SHG will learn to properly manage, utilise and repay their SHG loans.
  3. Assessment of the SHG. A clear and simple checklist is provided for a bank manager to use to determine whether an SHG is functioning well and is creditworthy. Example values for each criterion in the checklist are given under the heading of very good, good and unsatisfactory.
  4. Sanction of credit facility to the SHG. The group is collectively responsible for the repayment of the loan. NABARD accepts this as security, instead of the traditional collateral.

This handbook for forming self-help groups is complemented by the multimedia presentation “The Luminous Link” and a handbook for branch level managers, both of which are referenced here in the RFLC and are available from NABARD.

Author National Bank for Agriculture and Rural Development
Publisher NABARD
Number of Pages 34 pp.
Primary Language English (en)
Region / Country Global
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Community Savings Funds: providing access to basic financial services in marginalised rural areas of Mexico Article 2002

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The Community Savings Funds (CSFs) promoted by the Ministry of Agriculture in Mexico seek to provide marginalized community groups with a simple mechanism that allows them to save and administer their own funds securely, efficiently, and profitably, according to their own needs and priorities. Specially trained promoters help set up CSFs for a period of one year—using a standardized Toolkit—after which they are expected to work autonomously.

The CSF Project does not focus exclusively on providing credit for productive activities. People in marginalized rural areas have many consumption needs at different times of the year which often do not coincide with the times when returns from productive activities are available. In response to this need, the vast majority of CSFs have decided to grant credit for consumption requirements. This has proven very attractive to members—so much so that many members choose to take credit to meet consumption needs rather than withdraw from their savings.

The Administrative Toolkit is a standardized, yet flexible, kit used by every CSF for adequate record-keeping. CSFs receive no seed capital or external financial support other than training. The main service a CSF provides is, as its name indicates, savings collection. CSF members generally set a minimum amount of systematic savings that must be deposited by each member either weekly or fortnightly. Members themselves determine both the amount and the frequency of deposits. Keeping the cash safe is risky in a marginalized rural setting. Given that reliable financial intermediaries are generally not available in these areas, CSFs’ surplus income is either lent out to non-members; kept in a safe deposit box with 2–3 different locks, for which an equal number of members have one key; deposited in a bank account whenever a member happens to go to the nearest town; or kept by the treasurer in case someone has a need for an emergency loan.

The CSFs are currently outwith the provisions of the Popular Savings & Credit Law, passed in 2001, to regulate non-bank financial institutions that take deposits but reforms are underway. The Ministry of Agriculture realizes that it is short-sighted to pursue a strategy that promotes the unregulated proliferation of autonomous CSFs. So rather than promoting hundreds of CSFs in remote villages—whose follow-up by individual promoters would be very difficult—the new strategy envisages the creation of CSFs networks by linking new or existing CSFs to each other to form a formal financial intermediary in its own right, particularly in areas where no such services exist. Another option is to work through already established farmer organizations with an interest in providing financial services to their members, subsequently constituting themselves as a formal financial intermediary if they are willing and able to do so, or identifying existing formal financial intermediaries that are interested in incorporating CSFs as clients or members or turning them into a branch or service desk.

Author Zapata, G.
Number of Pages 25 pp.
Primary Language English (en)
Region / Country Global
Mexico
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Promotion of Self Help Groups under the SHG Bank Linkage Programme in India Paper 2002

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This resource appears in: Informal group finance

This paper, presented at the Seminar on SHG-Bank Linkage Programme at New Delhi in November 2002, discusses the role and development of Self Help Groups (SHGs) in India, a “unique process of socio-economic engineering”. It is a fascinating look at a from-the-ground-up way of bringing people out of poverty and will be of use to policy-makers. This study compares the way SHGs are promoted by Self Help Promotion Institutions (SHPIs), in order to enhance the quality and efficiency of the promotion process and thus to improve the extent and level of financial service provision to rural people now without access to formal financial services.

A SHG is a group of about 20 people from a homogeneous background, who come together to address their common problems. They are encouraged to be thrifty, and pool their resources to make small interest-bearing loans to their members. Once the SHGs show evidence of mature financial behaviour, banks are encouraged to make loans to the groups in certain multiples of the accumulated savings of the SHG. The bank loans are given without collateral and at market interest rates. The groups continue to decide the terms of loans to their own members. Peer pressure ensures timely repayment and acts as an incentive that effectively replaces the requirement for collateral for the bank loans. This study, including a survey and a questionnaire filled out by 82 respondents with personal knowledge of SHG promotion and financing, included fieldwork undertaken in Orissa, Uttar Pradesh, and Karnataka. 35 SHGs, 20 SHPIs, and 16 bank branches were interviewed, and though the author admits that the samples are too small to allow for definite recommendations, they were sufficient to suggest the following main conclusions:

  • banks, particularly co-operatives, are likely in the medium term to be the main SHPIs, but the author hopes their role in promotion will be overtaken by SHG members’ own initiatives
  • a regular national SHG sample survey should be put in place to allow the National Bank for Agriculture and Rural Development (NABARD) to monitor SHG quality and to delegate the management of SHG promotion to banks
  • SHC promotion should take place even for lower-grade bank staff, and schemes to encourage SHC promotion should be delegated to the banks

This study is both thorough and very readable, although its reliance on a series of acronyms takes some getting used to. If it has a weakness, it is that it jumps from subject to subject rather lightly; however, it provides an excellent survey.

Author Harper, M.
Publisher NABARD Microcredit Innovations Department
Number of Pages 84 pp.
Primary Language English (en)
Region / Country Global
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The group savings resource book Book 2002 English (en) Spanish (es) English (en)

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This resource appears in: Informal group finance

This book is the fourth in a series of FAO manuals on small farmer group development. It aims to encourage development agents to help the poor strengthen their capacities to accumulate productive capital through savings groups. The book is divided into two parts:

  1. A section discussing the advantages and disadvantages of saving in a group, the constraining and enabling factors to consider when starting a group saving activity and some commonly used group saving methods.
  2. A section that describes various tools that can be used to collect information when starting a saving activity, improve personal financial management skills, plan for investment and growth and monitor and evaluate the saving activity.

The group saving methods described include:

  • Rotating savings and credit associations
  • Accumulative savings and credit associations
  • Credit unions
The group savings resource book  -  English (en)

Documento  -  Spanish (es)

Document  -  English (en)

Author Rim, Ji-Yeune; Rouse, J.
Publisher Food and Agriculture Organization of the United Nations (FAO)
Number of Pages 88 pp.
Primary Language English (en)
Region / Country Global
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Grameen Bank Groups and Self-help Groups; what are the differences? Paper 2002

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Most rural micro-finance clients are organised into groups of some sort. There are many forms of group intermediation, but the dominant models worldwide are the Grameen Bank system, which originated in Bangladesh, and the Self-help group system, which is most widely practised in India. Each system has its advocates, and much debate on this topic appears to focus on which of the two is ‘the best’. This paper attempts to describe both systems, to analyse their respective strengths and weaknesses and to suggest which may be most suitable for particular types of clients, institutions and local environments.

After reviewing where, by whom and why the two systems used, the author assesses each method in terms of sustainability, outreach to and impact on the poorest, empowerment and institutional feasibility. The pros and cons are usefully summarised in a table at the end. The tentative conclusion drawn is that the Grameen system is more expensive but may nevertheless be more suitable for poorer communities, particularly in places where there are few NGOs to develop the groups, and few bank branches whose staff are willing to serve them. SHGs, on the other hand, can evolve quite easily from existing ROSCAs or other traditional financial or non-financial groups, and any bank can do business with them, so long as its management are prepared to deal with this unfamiliar but potentially highly profitable market segment. If there are many pre-existing groups, and if there is a wide network of bank branches, which need new business opportunities, the environment would seem to be ideal for the SHG system.

Author Harper, M.
Number of Pages 20 pp.
Primary Language English (en)
Region / Country Global
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Women, Microfinance and Savings: Lessons and Proposals Article 2001

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This paper suggests that the shift in terms from microcredit to microfinance reflects the acknowledgment that saving services - and not just loans - may help to improve well-being of the poor in general and of women in particular. Although microfinance often targets women and although women often use microfinance, it is noted here that product design rarely addresses gender-specific aspects of the use of financial services. Indeed, despite the pervasive belief that microfinance helps women, few programs have developed concrete ways to meet the distinct demands of poor women for saving services.

How can saving services best serve poor women? A source of lessons are the informal savings mechanisms that poor women already use all over the world: door-to-door deposit collectors, Rotating Savings and Credit Associations, and Annual Saving Clubs. Examples of practical uses of these lessons cited in this paper are the creation of the SafeSave organization in Bangladesh and the design of savings products at Bank Rakyat Indonesia (Robinson, 1994). These efforts are not gender-specific, but they do combine some of the strengths of informal and formal savings mechanisms.

This paper derives lessons from informal finance for the design of formal savings services that respond to women’s responsibilities for market production and for household reproduction and that respond to issues of cultural patriarchy and domestic violence. Two specific services are discussed. The first - safe-deposit boxes - allows women to maintain independent savings. It is argued that this boosts their freedom and bargaining power within the household and cushions the shock of divorce or abandonment. The second - matched-savings accounts - structures saving, promotes peer support among women savers, and subsidizes savings targeted to women-specific concerns such as health care or school fees.

Author R. M. Vonderlack, M. Schreiner
Publisher Center for Social Development, Washington University, Saint Louis
Number of Pages 29 pp.
Primary Language English (en)
Region / Country Global
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Do we really need SHG Federations? Editors Note

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This resource appears in: Informal group finance

This note challenges the accepted wisdom that it is advantageous for self help groups to form federations. Malcolm Harper is against adding any new layer of middlemen or middlewomen to any transaction unless it can clearly be shown that the new intermediary adds value.

The note sets out 10 statements which are designed to question whether SHG federations are really needed. The context is India but the points will have relevance elsewhere.

Author Harper, M.
Region / Country Global
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