A SAFI Project Learning Document on Financial Linkages
by S. Bakliwal and M. Umoh in 2011
World Region: Africa
Financial linkages are aimed at integrating the poor into formal financial systems on a demand driven basis, and encouraging the formal financial systems to view the extremely poor as potential markets. CARE Rwanda promotes this transformative approach to reduce poverty by linking savings‐led groups with formal financial services and innovations to make those services more accessible and affordable for the poor. The financial linkage will allow VSLA clients to access higher level financial services, including greater loan amounts to groups’ members, insurance and a more secure place to save their money.
Currently, CARE Rwanda through the SAFI project is partnering with Vision Finance Company (VFC), a MFI, to provide savings and loan products and services that meet the financial needs of VSLA clients without compromising the VSLA methodology. SAFI plans to explore partnering with other financial institutions to promote savings given the limited time frame and high demand for savings facility from the VSL groups.
This report analyzes the SAFI project’s VLSA groups linked to Vision Finance Company for the purpose of documenting current processes and lessons learnt comparing from previous linkages in CARE Rwanda. It also seeks to understand the challenges and successes of the current financial linkage in order to determine how the groups are affected by financial linkage and make recommendations for future actions for Rwanda and sub Saharan Africa.
Based on the analysis in this report, the financial linkage with VFC has been built on the lessons learnt from CARE Rwanda’s Banque Populaire experience. Despite operational challenges, the linkage has been very successful with no known adverse effects on the VSLA methodology. However, other MFIs and ways of linkage need to be considered for linkage scale up.
There is no indication that VSLA methodology is adversely affected by the linkage. On the contrary, linkage further strengthens the VSLA methodology and improves the performance of the group. The stringent requirement of the methodology in addition to the training and coaching received in the first year prepares the group adequately for linkage. Another important attribute of the methodology is that it instills discipline without being overbearing for poorest. It also self selects ‐ rejecting those who are lazy and not committed and rewarding the efforts of the creative and hardworking meaning that one joins only after a thorough an informed self reflective process.
The linkage process is still in its early stages and more monitoring is needed to determine its long term effects. However, based on the current qualitative and quantitative data available, the linkage has a positive effect on the poorest. Members of groups who did not borrow from the external loan accepted without complaint the reality that they are sharing risk for a loan which they themselves are not directly going to access. The prevailing rationale is that the interest that is generated from borrowers through the spread, which will be distributed in the share‐out, is a sufficiently attractive benefit to offset the downside of the solidarity group guarantee. For the same reason,
these non‐borrowing members do not complain even when the mandatory collateral deposit is paid with group fund resources. In the sampled groups where all the members did not desire the outside loans, those that opted out of the external loans still had access to the group's loan funds. Also, as those who did not make use of the increased borrowing capabilities saw the progress made by their fellow group members, they were encouraged to make use of there external loans and are waiting patiently for the next loan cycle.