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

Guest post by: International Monetary Fund

Article Overview: 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.

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.

Related Articles
  II. How Can MicroFinance Succeed In Africa?
  IV Module I Key Principles for an African Model of Microfinance
  III. BACKGROUND - Microfinance in Africa
  New Partnership for Africa’s Development
  SME's - why is franchising not more popular in Africa

Article Tags: Africa, Africa, Anupam Basu Rodolphe Blavy, banking sector, communities, cooperative banking, cooperative groups, cooperatives, cooperatives, development, Grameen Bank, group savings, group schemes, institutions, MFIs, mobilization effort



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