Linkages between CARE's VSLA's with Financial Institutions in Rwanda
CARE’s Village Savings and Loan (VS&L) methodology is based on a belief that savings rather than lending services are more appropriate for and in higher demand by the rural poor. VS&L programs emphasize savings mobilization through unregulated and rather informal groups that depend on member savings for their loan fund capital rather than external loans. CARE Rwanda’s CLASSE-Intambwe (Community Learning And Action For Savings Stimulation And Enhancement & Business) model is different in that Savings and Loan Associations are linked through federations (called Intergroupments) to external loan funds (provided by CARE) at the Banques Populaires, a network of credit unions located everywhere in the country. The SLA linkage to external credit is the subject of this case study, which describes its rationale, lists its strengths and weaknesses, and offers recommendations for VS&L and other savings-based financial service practitioners considering to replicate or adapt this model.
This linkage to external credit also needs to be seen in the specific context of Rwanda, a small land-locked country in Central Africa, with a very high population density of 328 inhabitants per square kilometer. While microcredit organizations in Rwanda barely reach the rural poor, the Banques Populaires have a strong presence in rural areas, but focused until recently for the most part on less poor people (such as salaried people, traders, and cash crop farmers). Thanks to the partnership with CARE, these credit unions have begun to reach the rural poor in line with their mission.
CARE Rwanda’s Savings and Loan Associations (SLAs) are Accumulating Savings and Credit Associations (ASCAs) just like CARE Niger’s MMD model and share most other features as well. SLAs are similar in size (7-30 members, average around 16) and receive the same training curriculum. SLA members meet and save every week into an internal loan fund. Members can take short-term loans from the revolving fund at an interest rate decided by the group, typically 5 or 10 percent per month on the principal, and they also contribute to a Social Fund, which can be used for emergencies and other non-productive needs such as medical insurance or school expenses.
SLAs in Rwanda also have certain unique features. CARE Rwanda typically does not promote new groups, but identifies and selects existing associations that are already formed (but are often inactive) before CARE enters a certain geographic area. Such associations are typically formed on the basis of a common productive activity (crops, animals, handicraft), and tend to require or at least favor ownership of some productive assets. Members of most SLAs are of mixed gender. Each SLA has a bank account with the local Banque Populaire into which any excess cash is deposited.
Perhaps the most innovative feature of CARE Rwanda’s SLAs is their federation into Intergroupments (IGs) consisting on average of 25 to 35 SLAs from villages clustered in a given area. The role of these IGs is to represent SLAs vis-à-vis CARE, the local Banque Populaire, local authorities and others. Intergroupments also provide training and advice to existing SLAs, and often train new associations in the CLASSE-Intambwe methodology. The IGs’ most important function is that of an intermediary between SLAs and the Banque Populaire to access credit.
Why the linkage with external credit? CARE Rwanda realized that the majority of members of CLASSE-Intambwe SLAs wanted larger loans than their internal loan funds could provide, and decided to make CARE Credit Funds at the Banques Populaires of CLASSE-Intambwe target districts. The link to external credit was provided to open new economic opportunities within and beyond the farming sector. Whereas savings and internal lending activities of SLAs are considered protectional (income smoothing) microfinance, the link to external credit signifies a more promotional (income generating) use of microfinance. In addition to access to loans, SLAs received improved business training (Selection, Planning and Managing microenterprises, SPM) and in some cases were also linked to promising value chains.
CARE provides a Credit Fund of up to 10 million RWF (approximately $20,000) per IG for loan disbursement to its member SLAs. SLAs can apply for loans as soon as one year after they have begun their weekly savings. Rather than applying directly to the bank, the SLA submits its business plan and loan application to the IG, which reviews, offers recommendations for improvement or returns the loan application until it deems it is strong enough to be accepted by the bank. Loans terms are the same as those for bank loans to regular members. The duration varies between 4 and 12 months, depending on the financing needs of the income-generating activity funded, and the annual loan interest rate is 14 percent (declining balance) plus 1 percent commission, to be paid back in monthly or quarterly installments. For the first cycle, the loan amount ranges between a minimum of 100,000 RWF ($200) and 500,000 RWF ($1,000). The SLA can decide whether the loan is used for a group income activity (which is most common) or for individual income generating activities by one or several members. Regardless, all SLA members are responsible for repaying the loan through a group solidarity mechanism.
The IG performs a loan application review and ensures that only sound loan applications reach the bank. The IG does not collect payments from SLAs, but monitors the loan repayment and assists SLAs whenever necessary. In return, IGs receive a 30 percent share of the loan interest revenue. This applies only to loans taken from the CARE Credit Fund, however, as banks are unwilling to “share” interest revenues on loans from its own funds. CARE Rwanda is currently in discussion with all stakeholders (SLAs, IGs and UBPR) to come up with sustainable loan terms agreeable to all. In addition to facilitating the linkage to external loans, IGs also perform other key services to SLAs, including business development services and business training.
Demand for external loans is higher than CARE Credit Funds have been able to provide so far. Not every SLA is interested and/or ready to submit a strong loan application, but interviews in the field revealed that there is a significant waiting list. Common uses of external loans are buying/selling of various agricultural products (beans, tomatoes, maize, sorghum, groundnuts); production and selling of banana beer; milk/butter (oil) production; honey; small livestock rearing; and handicraft production. The average external (first cycle) loan is $634. The repayment rate of 93.5 percent is not as good as for internal loans, but satisfactory if one considers that all parties (IG, BP and SLAs) are still learning the procedures.
One of the most significant outcomes achieved through the linkage to external credit is that SLAs have access to loans up to four times the amount of their accumulated savings, which enables them to engage in bigger and potentially more profitable enterprises. Without the assistance by the IG these SLAs would not qualify for such loans. There are also some potential costs to an external loan: by depositing 25 percent of the loan amount on the SLA bank account as a guarantee, the available internal loan fund might become much less, unless the SLA sets aside a portion of the loan to continue serving this purpose. At the same time, due to leverage with an external loan, the internal loan fund might grow faster depending on the profitability of the enterprises funded by the loan. External loans might not provide the same benefits for every SLA member, as a few dominating members might be using the bank credit to finance their enterprises, whereas the other members might not like the increased risk or see their access to internal loans reduced.