2.1 The CommunityBased Approach in MFI Development: Microfinance in Africa - Experience and Lessons from Selected African Countries

(IMF Working Paper, Prepared by Anupam Basu, Rodolphe Blavy, and Murat Yulek1, September 2004)

An approach commonly followed in African countries has been to rely on local communities to support the development of MFIs, outside the formal banking sector.4 As MFIs operating outside the formal banking sector had to find their own sources of funds, the development of innovative saving vehicles was important and supported by participatory efforts in local communities to form cooperatives. Consequently, traditional communitybased cooperative groups such as local clubs and village associations have played a central role in the savings mobilization effort and the expansion of other microfinance services in Africa.

The development of cooperative banking and savings and credit associations is a good example of a community-based cooperative approach. In Benin, the large network of MFIs is dominated by saving and loan cooperatives and mutuals (SLCs). In Ghana, Rural and Community Banks (RCBs), which are unit banks owned by members of the community (through purchases of shares), account for the largest share of microfinance services, while the Savings and Loans companies (S&Ls) are the second largest type of MFIs. Modern cooperative societies have also started expanding services to non-members, in order to overcome the resource constraint to their development. More generally, many institutions have relied extensively on establishing participatory cooperative groups.

The efforts of MFIs to work through group-schemes have the potential of yielding a wide range of benefits, leveraging the importance of local communities in Africa into schemes that have proven successful in other regions, the most notable of which have been developed by the Grameen Bank.

• At the level of the clients, group savings schemes are advantageous as individuals mobilize their savings jointly, and can use joint savings as security against loans.

The aggregation of individual savings may allow group members to constitute larger collaterals and enhance their access to credit services.

• At the level of the institutions, on the saving side, the use of groups and community-based organizations provides scope for generating substantial economies of scale for the collecting institution. These schemes can facilitate the development of institutions that can operate on a full-intermediation basis, rather than specializing either in collecting savings or lending. Since most credit-only institutions eventually reach a point where they are constrained on the resource side, deposit mobilization provides a sustainable basis for expanding lending operations.

MFIs have the potential for eventually graduating to a less constrained marketbased approach to the management of both sides of the balance sheet. They could promote more efficient intermediation.

• At the macroeconomic level, deposit collecting institutions can help to increase domestic financial savings mobilization by tapping the resources of the poor who are otherwise isolated from the formal financial system.

• Finally, by providing financial services on both the deposit and lending sides, MFIs that serve groups and communities could empower underprivileged social constituencies to contribute more effectively to economic development and poverty reduction. While MFIs have commonly focused on women, they may also benefit other social groups.5 One could argue that MFIs could serve as appropriate vehicles for targeting such groups.

In Africa, both group and individual savings and credit programs are used by cooperatives and associations. “Village Banking,” an adaptation of the Grameen Bank model first introduced to Africa by K-REP (Kenya), provides a good illustration of the use of group solidarity and of the linkage between saving and credit instruments. In this model, operated for example in Tanzania by Catholic Relief Services and the SNV/Netherlands Development Programme, both share capital and savings deposits are mobilized from members (sometimes with a match from donors). Loans are made to groups of ten members, but benefiting only half of them at a time and reaching the second half only after repayment of the initial loans.

Also, a number of other institutions in Ghana are seeking to expand their activities and progress towards sustainability by pursuing a variety of approaches:

• In a group savings with credit scheme, a group of members mobilize and pool their savings jointly to qualify for a loan and may then use group savings as security against loans.

• In a group and individual savings with credit scheme, group and individual savings accounts coexist, both of which can be used as collateral. Group savings provide an additional security to back an individual loan. Loan repayments are made individually but handled through the group account. In such schemes, the institution minimizes its risk by basing its loan on a high collateral, and involving group solidarity. In Ghana, examples of MFIs using this scheme are Nsoatreman, Bosomtwe, and Lower Pra RBs.

• With individual savings with group lending, the group handles the collection of individual savings, receives the loan for distribution to members, and bears group responsibility for recovery. A number of MFIs use this scheme, including in Ghana, Brakwa, Nsoatreman, Bulsa Community Bank, Women’s World Banking Ghana, and Lower Pra.

• Finally, the individual approach to both savings and credit may prevail if individuals have established a credible credit history, or in cases where the group approach is not appropriate. To learn more about this author, visit International Monetary Fund's Website.

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