CARE Ethiopia - Sidama Project OfficePSNP PLUS Project

VSLA Vs MFI Linkage and Product Design Validation Workshop

Teshale EndalamawMarch 25, 2011

Tadesse Enjori HotelHawassa

Outline of the presentataion

Back ground

• Contributing factors, such as soil depletion, low agricultural productivity and shortage of arable land have hindered Ethiopia’s food security for years;

• The increasing reach and severity of these factors necessitate innovative approaches, new partnerships with successful institutions, and coordinated, multi-sector interventions.

• Dale and Loka Abaya Woredas are one of the drought affected and food insecure Woredas of Sidama Zone

Cont …

• The Productive Safety Net Program (PSNP) has provided invaluable assistance to food insecure households through providing the basis for the building of assets;

• CARE Ethiopia – Sidama Project Office in partnership with Woreda line offices proposed and planned a two years project

Cont …

• to assist poor, rural households taking part in PSNP move towards graduation

• to empower poor households to make informed decisions about scarce resources,

• major and central theme of the project is, to link the participants to MFIs and markets

• aims to assist 5000 households, in both Woredas (Dale and Loka Abaya Woreda)

PSNP PLUS Project Goal and Objectives

• Goal: - – “Targeted PSNP households’ resilience improved and

livelihood assets enhanced as a means towards achieving graduation.”

• Objectives: - – Objective 1: Targeted PSNP households have

increased their financial assets as a result of access to financial products and services.

– Objective 2: Targeted PSNP households are engaged in functioning markets.

– Objective 3: Government and private sector strategies show greater support for engaging PSNP participants in market-based activities.

Approach to microfinance access

• Track 1 - encompasses access to microfinance through informal VSLA mechanisms

• Track 2 - encompasses direct access to microfinance through a system of: – a) soft/guarantee loans for asset transfers (with

repayments managed by formal MFIs) especially designed for PSNP participants; and/or,

– b) promotion of links to formal MFIs for the take-up of food security packages and other credit and savings based services.

Objectives of the study

• To identify the PSNP participants and VSLAs needs and preferences to financial products and services with respect to their livelihoods and their aspiration to move towards graduation from PSNP;

• To examine the feasibility of developing new financial products and services or customizing currently supplied products and services by MFIs based upon the assessment of business opportunities and market potentials for financial products and services;

• To support partner MFIs in developing new financial products and services or customizing existing ones based on client need assessments; and

• To recommend the most appropriate linkage mechanism and service delivery.

PSNP in the project Woredas

• was introduced in 2006 (1999 EC) • assistance for six consecutive months of

the year • According to the 2008 PSNP participants –

– 9,135 in Dale and 19,170 in Loka Abaya

• Based on this benchmark, up to 2008 graduated participants – – 127 Households (458 individuals) in Dale and

275 Households (929 individuals) Loka Abaya

PSNP in general term• Starting in 2005 it is new form of safety net

program• targeting poor households in two ways,

– public works (PW) and direct support (DS)

• Objective– “To assure food consumption and prevent

asset depletion for food insecure households in chronically food insecure Woredas, while stimulating markets, improving access to services and natural resources, and rehabilitating and enhancing the natural environment.”

The process of graduation

Village Saving and Loans Associations • pioneered by CARE • reaching approximately more than two million very poor

people in 22 countries • VSLAs are

– self-managed groups – do not receive any external capital – complementary to MFIs – serve people living in remote places whose income is low and

irregular – provide people with a safe place to save their money, access

small loans, and obtain emergency insurance. – focus on savings, asset building, and the provision of credit,

proportionate to the needs and repayment capacities of the borrowers.

– low-cost, simple to manage and can be seen as a first step for people to reach a more formal and wider array of financial services.

– dramatically raise the self-respect of individual members and help to build up social capital within communities.

Key elements of VSLA • Self-selection:

– comprised of 15 to 30 people, trust is fundamental so members select each other to form their group.

• Training: – The methodology offers record keeping techniques suitable for literate and

illiterate people.• Governance:

– Associations are comprised of a General Assembly and a Management Committee.

• Financial Services: – associations meet at regular intervals, – once sufficient savings have accumulated loans are offered to members with

interest rate for loans– at the end of the year, members receive a return on their savings, – VSLAs set up an insurance fund, often called a social fund, as grants or as

interest-free loans with flexible repayment.• Audit:

– Some nine to twelve months after the VSLA is formed• Agency facilitation:

– up to the first action audit– if there are no issues, the group functions independently thereafter.

Strength and Constraint

Strength Constraint Rural and poverty outreach:

Low operating costs:

Capital remains within group:

Transparent, democratic and flexible:

Client debt level:

Conduit for other interventions:

Opportunity for increased economic activity:

Limited capital:

Limited product offering:

Interrupted savings:

Elite capture:

Exclusion:

Theft:

Opportunities for innovation

• Several opportunities for innovation have been identified which, if addressed, would spur scale up of financial services to the poor.– Linkages to formal financial institutions: – Income Generation: – Sustainability and quality: – Building institutional linkages:

Financial Linkages

• any mutually beneficial partnership between a formal and less formal institution that results in the expansion of rural financial services (Pagura and Kiristien, March 2006)

• two different categories of financial linkages: Direct financial linkages and facilitating linkages

• Linkages, according to Kirstein (2006) are expected to expand financial outreach in one or more of the following ways:– Reach new segments of the rural population not traditionally

served– Improve the quality (terms and conditions) of existing products

and services– Broaden the variety of products and services available

New Product and Service Development and Design

• passes through three major phases: the design, testing and launch of the product

• includes the introduction of – new financial services (such as savings or insurance), – new product features (such as loan terms,

amortization schedules, and interest rates) and – tangible products (such as smart cards).

• feature of the developed or designed product ultimately determines success

• MFIs should give careful consideration to options for refining, repackaging or re-launching their existing products.

Cont …

• Michal Matul and Dorota Szubert (2005) also state that products are successful in a market only if those offering the product address three critical questions:

1. Which groups to serve?

2. Which needs should be satisfied?

3. How to pack the product?

Steps followed for assessment

1. MicroSave’s PRA tools were used 2. Interviews and questionnaires was administered 3. Using cluster sampling for this study we chose 13

Kebeles (5 in Loka and 8 in Dale) 4. Using a random sampling method 35% VSLAs were

selected for 5. Key informant interviews and focus group discussions

were held 6. Different documents in line with MFIs new products

and service development were customized or existing ones were reviewed; and

7. The gathered data was analyzed using a qualitative analysis technique.

Participants/Sample of the study Type of Respondents Kebele Assessment type

DALE and Loka

Members of VSLAs 13 Kebeles: Ajewa, Gane, D/Kege, Danshe Sire, K/Simita, Awada, D/Mesenkela, Aleta Sodo, Chancho, S/Sire, S/Kebado, and Tula Gorbe

13 FGDs and PRA

Frontline Staff (CFs and Loan Officers)

Loka and Dale Branch SMFI and CARE Ethiopia

Overview discussions at different times

Management Staff Head office and Project office Overview discussions at different times

Agriculture and ruralWoreda food security

Dept

Loka and Dale Woreda Overview discussions at different times

Woreda FEDO Loka and Dale Woreda Overview discussions at different times

Woreda Administration Loka and Dale Woreda Overview discussions at different times

PRA Tools employed for the study 1. Seasonality analysis of household income,

expenditure, savings and credit: 1. Among the tools this is an ideal tool for obtaining information

on seasonal flows of income and expenditure and the demand for credit and savings services. This exercise also provides:

• Important insights into some of the risks and pressures faced by clients and how they use MFIs’ financial services to respond.

• Insights into the financial intermediation needs of the community and what products the MFIs can design in response.

2. Seasonality analysis of migration, casual employment and goods/services:

1. This tool helps to look the availability of cash to the people in the community - and examines how far they might have to migrate to find work (when it is available). This has important implications for their ability to make regular savings and loan repayments.

VSLAs profile participated in the assessment

No. Woreda

# of VSLAs

assessed

VSLA Member

SavingMobilized in

Birr

Amount of Cumulative

Loan

Number of Cumulative

Loan

PSNP Non PSNP Total Member

F M T F M T F M T

1 Dale 21 153 170 323 35 40 75 188 210 398

19,065.00

32,890.00 375

a. Percent   81 19 47 53     173 94

b. Average   15 4 9 10 19 47.90 87.71  

2 Loka 9 92 52 144 15 3 18 107 55 162

7,669.50

17,969.50 200

a. Percent   89 11 66 34     234 123

b. Average   16 2 12 6 18 47.34 89.85  

3Both Woreda Total 30 245 222 467 50 43 93 295 265 560

26,734.50

50,859.50 575

4 Both Woreda %   83 17 53 47     190 103

5Both Woreda Average   16 3 10 9 19 47.74 88.45  

Number of committees participated in FGD and PRA

  Kebele Female Male Total

1 Ajewa 3 7 10

2 Gane 3 7 10

3 Wara 4 5 9

4 Awada 3 7 10

5 D/Mesenkela 4 9 13

6 Danshe Sire 2 7 9

7 Tula Gorbe 2 7 9

8 Sala Sire 3 6 9

9 Sala Kebado 4 4 8

Total 28 59 87

Percentage 32 68  

Business common in the area Dale Woreda Loka Abaya Woreda

coffee, butter, poultry, petty and small shop, sweet potato, cattle, sugar cane, canteen, flour, fire wood sale, banana, onion, potato, cloth (“salbaje”), garlic, and kocho trading

grain, chat, banana, butter, flour, canteen, petty and small shop, poultry, agricultural commodity sale (peas, corn, teff) and coffee trading

Businesses practiced by VSLA members

Dale Woreda Loka Abaya Woreda

coffee, butter, poultry, petty and small shop, sweet potato, cattle, sugar cane, canteen, flour, fire wood sale, cabbage, tea shop, animal fattening, banana, tomato, garlic, and kocho trading

grain, chat, banana, butter, flour, rum canteen, petty, small shop, poultry, agricultural commodity sale (peas, corn, and teff), coffee sale, flour, corn, and cabbage trading

Their relationship with MFI

• ‘have you ever been the MFI client?’ – None of them received loan from MFI so far – However, they have seen some of their

neighbors received loan from SMFI for goat fattening purpose only

Service sufficiency by VSLA for members

• All committees of both Woredas agreed that the service offered by VSLAs is not enough and this is because of the limited loan fund contributed by members – “Asabu Addis Ababa nabri gini miniyadergale

aqimu Abosto asqarai.”

From Awada Kebele– “My plan was to be in Addis however I remained

in Abosto due to capacity.”

From Awada Kebele

Challenges faced by VSLAs

• In both Woredas, committees said the major and only bottleneck, in running their associations well, is financial shortage.– do not receive adequate amount– sometimes creates a conflict of interest

among them

New product demand • to increase the loan amount the group offer for

members• to start a group business and • to expand and diversify their existing businesses

Business type and amount of loan demanded

No. Business type Partnership Loan demand range

1. Grain trading As a group and/or individually 500 – 600 ETB

2. Cattle trading As a group and/or individually 500 – 6000 ETB

3. Petty trading (flour, slat, coffee, oil, kerosene, sugar, soap…)

Individually 500 ETB

4. Banana, sugar cane, garlic, tomato

Individually 500 ETB

Cont …

Additional fund for VSLA

Additional loan

Diversify a business or start

a new one

Additional income

More saving

New life style

Addition fund contribution for life style and business

Readiness to saved, to take loan and loan feature

• they are interested in receiving loans from MFIs to expand their business– to receive loans as groups – then disburse among their members according to their

bylaws. – the groups’ loan should have a fair interest rate with

smooth eligibility criteria’s. • They also expressed their interest in depositing

their savings in the institution. • Although participants have articulated their

interests, the decision lies with the general assembly whom the MFI should approach with an offer.

Seasonality analysis of migration, causal employment and market

Seasonality of Migration, Availability of casual Emlpoyment and G/S provided by the poor

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Sept Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Months

Para

met

er a

vera

ge

Availability casual employment

Migartion

G/S provided by the poor

Seasonality analysis of Income, Expenditure, Saving and Credit

Seasonality analysis of Income, Expenditure, Savings and Credit

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Sept Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Months

Par

amet

er A

vera

ge in

the

mon

th

Income

Expenditure

Savings

Credit

Conclusion

– The VSLAs are ready to take loans and save in MFIs;

– They need to get loans as a group;– The VSLAs have an experience with

businesses and other IGAs;– The are well acquainted with the benefits of

saving;– Financial shortage is the major bottleneck in

running their group activities;– They have high incomes from September to

January;

Cont …

– September to November and March to April are months of high expenditure ;

– Saving is very high from September to January and it declines from January but does not cease;

– They need credit for businesses from September to January;

– Causal employment opportunities are very high from September to November;

– Migration is high from October to December but not for a long period of time;

– Markets are available throughout the year, however this increases from October to May;

Recommendation • According to MDTCS (2009), graduation and

direct engagement models are the two widely known basic linkage models. 1. Graduation model:

– the safety net programs themselves develop basic financial services for their clients in order to help them better manage their livelihoods.

– MFI’s engagements with the safety net programs are very limited

– MFIs simply coordinate with the safety net program to recruit successful graduates as customers.

2. Direct Engagement Model: – involves a more intense collaboration between MFIs and

the safety net program – MFIs establish a separate subsidiary or affiliate that works

directly with safety net participants – Successful graduates gain access to MFI’s regular

programs

So …

• In the case of Dale and Loka, the direct engagement model is preferable due to the fact that– in this model MFIs collaborate with instead of coordinating, – directly involved in the process of linkage and offering services. – No matter what, the direct engagement model is suited as a

linkage modality since,1. CARE Ethiopia will provide the partner MFI with guarantee fund to

document risks associated with the linkage and capacitate the voluntarily established VSLAs by offering trainings on IGA SPM, BST and Financial education

2. MFIs will open a special account to properly manage and track the status as well as it contributes 10 percent matching fund and provide loans to the VSLAs’ on group basis with out asking collateral and

3. VSLAs will in turn provide loans to their members according to their bylaws.

proposed as a linkage model

CARE Ethiopia

VSLA lend to Members

Members engage in IGAs

Guarantee fund for MFI

MFI lend to VSLA

BST and FL training for VSLA members

the linkage arrangement should focus on existing products and services of MFIs by redesigning the basic

attributes of a product and services according to the target market the VSLAs.

Redesign Existing Savings Products

• months from September to January are the highest income earning months

• so, savings mobilized by VSLAs in these months are very high

• hence the MFIs should pay attention for these months to mobilize saving

• should ensure the accessibility of savings to clients for withdrawal during critical time

• should consider the upcoming inflation, other institutions rates and their own current interest rate

• should consider their clients views on the benefits gained from saving money in the institute rather than investing in other IGA

Redesign Existing Loan Products

• the communities require loans from September to January to start businesses and diversify their existing businesses.

• so, MFIs should redesign their loan products based on their clients’ needs,

• Therefore, the loan attributes should be redesigned as follows:

Cont …

1. Loan Size: The estimated loan size to run these businesses is up to 6,000 ETB.

2. Loan Term: should be six months to one year according the business plan submitted by the clients; for most businesses six months is feasible.

3. Installment Period: must coincide with the cash flow of the VSLAs and it is advisable that the installment period is twice within the loans term. Therefore, the first installment period should be within the third month of the loan agreement.

Cont …4. Service Charge and pass book: MFIs will not incur any

cost in attracting VSLAs as customers. Therefore, MFIs should not include any service charge fees on the service delivery expense. However, the pass books printing cost can be passed on to the clients at a fair price.

5. Interest Rate: The rate should be reasonable and fair; a 12.5% flat rate to be paid at the end of six months

6. Insurance: The benefits of insurance have not been considered for farmers or other participants. MFIs should work hard to acquaint clients on the benefits of insurance. Loan insurance premium safeguards both the client and the MFI from unnecessary dispute arise.

7. Retaking the loan: No matter how, the loan term for one VSLA group is proposed to be six months to one year. If the VSLA proved to be successful, the MFI should design a mechanism to provide subsequent larger amount of loan by revolving the fund taking into consideration availability of loanable fund.

Gallaattemmoo.