Working with MEDA has been a busy unpredictable but mostly informative first month. I am interning at the main office for the EDGET project, which stands for Ethiopians Driving Growth Entrepreneurship and Trade, also meaning progress in Amharic. EDGET is a pro-poor five-year project, funded by the Canadian government with the objective of raising the incomes of 10,000 weavers and rice farmers.
Theoretically speaking, raising income is a strategy to improve food security. We hope rural Ethiopians will become more resilient against famines and less dependent on food aid programs as a result of EDGET interventions.
There are many different facets to such an ambitious project, and I am primarily focused on financial services. Financial services supports EDGET’s objective by employing financial interventions, like the Village Savings and Lending Associations (VSLAs).
Village Savings and Lending Associations
The VSLA model was pioneered by CARE in Ethiopia and is a low cost, effective and sustainable method of educating low income, often illiterate groups to practice saving and lending together. VSLA is well suited for Ethiopia, considering 83% of the population lives in rural areas and 70% of adults are illiterate.
A VSLA I visited 35 km outside of Mizan Teferi.
What is VSLA?
The village saving and lending association is a group of 10 – 20 self-selected individuals who agree to save a predetermined amount each week. As the pooled savings grow, members can take out loans and pay interest to the group, allowing the fund to expand further.
In the case of EDGET, community promoters introduce the concept, initial training, and startup materials to the project’s target weavers and farmers. After 9 – 12 months, the VSLA graduates the program and chooses to either divide the accumulated savings between members and stop, or continue saving as a group, independent of MEDA.
Why does VSLA Work?
The members are decision makers in every aspect, and create an association flexible to them. Members can easily respond to the specific needs of the group, such as sudden deaths or unforeseen business risks.
Some members are already a part of informal credit groups, like Iqqub or Iddir. VSLA is a natural extension of such programs, adapting easily to the rural environment.
Typically, credit is perceived as high risk, while savings is a readily adopted practice.
Aside from a few startup materials (2 bowls, cash box and notepad), there are no operating costs. Note, the community promoters typically receive payment for upfront training and in-kind payment for follow-up.
A snapshot from MEDA’s training session for VSLA promoters. The training informs participants on community engagement and approval, how to set up VSLA, savings/credit concepts, and monitoring and evaluation.
The group is voluntary and small, allowing for transparency, accountability and most importantly trust.
Acts as a common ground to share community issues, encourage income-generating activities, and eventually apply for microfinance institution (MFI) membership.
VSLAs are independently operated, long after NGOs have left.
From the project’s inception (February 2011) until October 2011:
50 VSLA groups were formed. (More recent figures will be coming soon for 2012)
In 39 groups assessed:
|Savings Mobilized From…
||Amount Ethiopian Birr (ETB)
$1 CAD = 16 ETB
|Amount per Group
|Social Fund Contribution
|Fines & Interest
|Total (savings + social + fines)
Some groups are engaged in income generating activities (such as commerce of various grains, making and selling local drinks) with the savings fund. Others have decided to use the fund for lending to group members, thereby earning interest.
The ledger used to track attendance, savings and loans disbursed.
One question that immediately emerged in my mind … How can these weavers (or farmers), who live a hand-to-mouth existence, save even a few birr weekly?
Understanding the issues that weavers currently face helps answer this question…
1) No Concept of Saving
Since these weavers have had elementary or no education, and positively no financial literacy training, they have no concept of frequent saving.
2) Immediate Household Spending
When weavers receive profits from traders, they immediately spend their earnings on household consumption, perhaps fitting a drink or two of tej (locally produced honey beer) in too.
So how does the VSLA model remove the immediate spending habit?
As is the case with Grameen bank and other successful microcredit schemes, social pressure lies at the center of successful group saving. Nobody wants to be the neighbour who doesn’t have his/her life together and misses a payment.
An important aspect of VSLAs that must not be overlooked, is the need to mobilize savings. If the fund is not used for anything, the savings group is unnecessary. So another question I had … What if members want to take out loans at the same time?
Potential borrowers need to submit their loan proposals to the group. Each proposal is disseminated between members, and a democratic vote is cast to determine the most deserving candidate.
What about Microfinance Institutions – Isn’t it their role to provide financial services to the poor?
VSLAs are complementary to MFIs. MFIs are not designed to lend to extremely poor clients, where income is inconsistent, repayment rates are poor, and loan amounts are so small that they are unprofitable. Rather, MFIs are better suited to accommodate growing entrepreneurs, whose income is expected to rise significantly and has greater access to capital. VSLAs accommodate clients lacking collateral and who are exposed to high risks in generating income.
One indication that the VSLA model is working effectively is that there is a growing demand for VSLA in the project areas. Since the first year, more low income earners want to join VSLAs. Unfortunately, MEDA does not have the resources (or strategic capacity because our target is farmers and weavers) to meet the demand. This is a bittersweet outcome, as illiterate poor entrepreneurs do want to improve their financial literacy to live out better livelihoods.
If you’re interested in supporting EDGET click here.
During my visit, we found that members had disbursed two 500 ETB loans to members for purchasing fertilizer.