In South Africa, as elsewhere, traditional and informal ASCAs have a tradition of disbursing loans from their internal fund to those outside the group. At Mpendulo Savings, many of our current members became disillusioned with this practice and left their previous groups or converted their traditional system to the one we promote (standard VSL à la CARE methodology).

To make a long story short, our members’ bad experience typically had to do with uncollectible loans. And in their new groups (or old groups who converted to a new system), they have agreed that loans should be for members only. This was a standard premise of the methodology we promote anyway, so everyone was happy. In fact, it became such a foregone conclusion that very little discussion was generated around the topic during training and development of group constitutions.

Now however, conflict is cropping up in a few groups because one or two members are using their loans to on-lend to outside community members at a much higher interest (50%/month) than the one set by the group (10%/month). The purpose they give when asking for a loan from their group is “Business”, but they fail to mention that it is the business of a loan shark!

In one group, it has caused such dissension amongst the membership that we fear a break up. The training officer is preparing to conduct some conflict mediation with the members of this group, but it hasn’t come to that yet. Basically, one part of the group says, “No, lending to outside members at a higher interest rate is just wrong and is way too risky”. The other part says, “Hey, it’s a business and we said in our constitution that giving loans for business is a priority. As long as she pays back the loan we don’t care how she uses the money!”

As for me, well, one of our stated goals is to work towards reducing the debt burden carried by our membership. In South Africa, consumer debt is a very real and serious issue. So this makes it a moral dilemma for the organization, how can we be for reducing the debt burden of our members, yet at the same time our members are becoming part of the machine that is indebting others?

PS: by debt burden, I am referring to members that make use of credit instruments that charge a lot of interest over time relative to what is being purchased; such as hire-purchase schemes, money lenders, consumer credit (called micro-loans or cash loans here), and credit cards or accounts at shops.

Would love to hear readers’ perspectives on this situation.

BTW, you can get more information on Mpendulo Savings at www.mpendulosavings.co.za

 

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I have seen this problem almost everywhere I have worked. Members of village banks in Cambodia almost always lend outside their groups, and they always bump up rates sharply compared to loans to members. In India I've observed SHG leaders lending outside their groups without the groups' knowledge, taking personal profits on the use of group money. In a recent assignment with Tanzanian VSLAs, I found numerous groups engaged in 'group business' together -- and it was clear that 'group business' was often a euphemism for moneylending! 

In VSL, if they do not lend outside the group, they may be sitting with half or more of their cash idle at any one time, reducing everyone's profit. Large amounts of excess cash also leave the group with no incentive to save more together, even though that's their basic purpose. But once a group becomes accustomed to lending externally at a rich price, members may have to go to the back of the line when they need a loan, or even pay the higher rate to get priority.

A relatively simple solution is to insist that anyone who receives a loan must join first. This restructures an awkward normative/ideological issue into a technical problem: how do we make it easy for people to join? The cycle-end valuation method can be employed quarterly, for example, and all entrances and exits valued accordingly. This means that someone who wants to borrow doesn't have to pay 25 weeks worth of contributions in mid-cycle to get in, which would usually not be worth it. They simply pay up from week of the most recent valuation.

I'd love to test this out in the field. Has anyone done so as yet?

Thu, April 21, 2011 | Brett Matthews

I've seen savings groups become money lenders several times, and it must happen frequently: when there are people with surplus cash, and other people who want to borrow, no force in the universe can keep them apart.

Brett, you describe that as a "problem" - I'm not sure it necessarily is. If the group democratically and transparently decides to lend some of their money as a group IGA, or if an individual lends some money for interest, that increases the financial options of the secondary borrowers, and may push interest rates down, even if ever so slightly. Of course, the group may lose money, or the individual member may not get paid back, but those risks are inherent in any IGA. More likely, they will get a very good return.

Also, I don't think we need to figure out how people can join in the middle of the cycle. In my experience that happens all the time. The group and the person negotiate the terms of entry, money changes hands, the details probably do not respect principles that are taught in finance classes nor those of the VSLA manuals - and, at the end of the day, the group and its members are usually better off.

Fri, April 22, 2011 | Paul Rippey

Hi Paul!

I'm all in favour of more business taking place. But, once the group is lending to non-members, charging them a higher rate, those non-members have no access to the governance system. Members are no longer seeing all transactions, and borrowers within the group may not be able to access loans at the agreed price. Groups are kept to 20-25 to avoid exactly this sort of thing. Lending outside the group creates a situation in which the group effectively keeps growing -- possibly indefinitely -- and transparency is lost. Deterioration of governance may not be far behind. In my view, letting the group grow to be 30 or even 40 is far preferable (though it should split before the next cycle). The trick is to get everyone inside the same governance umbrella and then charge a single visible and mutually agreed price for every loan. After that, the more business the better!

Brett

Fri, April 22, 2011 | Brett Matthews

Thanks Brett.

Well said. Let me be clear that I feel the weirdness and am aware of the risks when savings groups get into money lending, and I agree that the ideal situation is to get everyone under the tent, or multiple tents. 

Paul

Sat, April 23, 2011 | Paul Rippey

I too agree that more business is better, but not at the expense of transparency. And it also makes sense that the risk inherent in the money lending business is a risk shared by most business. Yet, there is something unsavory that I can't quite put my finger on when it comes to groups or individual members becoming money lenders.....

One thing I can say for sure is that I agree with Brett that lending outside the group can lead to a loss of transparency. Most of our groups' constitutions have a statement in them saying loans are for members only. So when a member takes a loan for the purpose of on-lending, they are knowingly breaking that rule. When group members are sneaky about the purpose of their loans, it undermines the trust and unity of the group. And for me at least trust and unity are the real equity built within these groups. Those two things, strengthened by transparency and discipline are what leads to a system with integrity which can last a lifetime. 

On another miscellaneous note, I'm not sure I agree that having excess liquidity will automatically lead to members losing the motivation for saving. We have some groups that are very risk averse and are happy as clams to let 50% or more of their money sit idle. They will STILL get way more than if they kept their savings in the bank. However, not all groups feel that way.

At any rate, thanks for the food for thought. I will let you know what the group debating this issue decides.

Sun, April 24, 2011 | Jill Thompson

Roll on the entrepreneurial spirit! As Paul suggests, demand+supply = enterprising behaviour! If savings group members who, for whatever reasons apply to them at a point in time, have no immediate use for the loan funds they obtain from their group, then find another productive/profitable use for those funds are they not fulfilling the intent of what we espouse: the development of market-orientated income-generating enterprising entrepreneurship?

In the solidarity group-based programmes introduced by CRS in SE Europe, it was typical for each group member's loan proposal/application to be reviewed by the group (in addition to a technical/verification review by MFI staff). The theory was that their local knowledge would test the believability of the proposed enterprise activity to be funded ("nobody gets that sort of yield from a cow around here!"), in addition to maximising transparency and solidarity. It never went as far as a post-borrowing 'audit' to confirm the actual use of funds -- although follow-up by MFI staff would effectively do this.

How does it work in the VSL model?

Mon, April 25, 2011 | Greg Pirie

Hey Greg
In the VSL model, there is no loan application perse. It is a verbal application done at the time of the group's meeting where all saving and lending activities take place. The group members alone decide whether a particular member's 'application' is worthy of a loan. In my experience, it is only when the group's accumulated loan fund isn't enough to fill demand that there is debate or when a member has not had a good track record in either saving or repayment. Otherwise, the group generally approves all loans right then and there. The field staff attending the meeting will provide coaching if there is an issue, but, again, generally doesn't interfere with the groups' decision making process. Also, no one is forced to take a loan and can be a net saver with no penalty. So if one doesn't have a need for a loan, their savings is either left dormant or used by someone else that needs it. Generally accepted practice is that a member can access loans up to 3x's the value of what they have saved in the group fund. 

The underlying principle is that, since the loan fund is capitalized only from group members' savings, it is 'hot' money and loan disbursement will be carefully monitored by the group since they are the ones taking the risk and will lose out if the loan isn't repaid. Word of mouth and simple observation of each others daily activities confirms that the loans are used for what they were intended. 

One comment on your phrase "development of market-orientated income-generating enterprising entrepreneurship".....and this is only my opinion from observing South African urban township practices.....it seems to me that people are jumping on the money lending business bandwagon here because it is perceived to be 'easy money' which doesn't require much effort, as opposed to other types of business dependent on physical capital (i.e. small shops, or buying/selling various products). Some of the people who are now starting to engage in money lending don't necessarily have alot of business experience and I have a hunch that they are taking the easy way out without appreciating how risky lending money can actually be. It is almost as if money lending is becoming the new 'get rich quick' scheme....anyway, just sayin'..!

Mon, April 25, 2011 | Jill Thompson

Thanks Jill

It seems to me that we’re teetering on the edge of an interesting can of worms here: the place our values system has to play in the work we do with people trying to make positive differences in their lives. These exist both as the set of assumptions we have accepted as determining the broad context of what we do (what is ‘development’; the use of a market system centred on private property ownership; and more) and the explicit values we promote to the recipients of our interventions (transparency and discipline are ‘good’; money-lending is ‘bad’; credit systems supported/guided by us are ‘good’; and more).

When we play a role in a savings group system, are we simply facilitating the mechanism, leaving the use to which it is ultimately put entirely up to the participants? Or are we applying a set of values -- often unspoken -- that want to channel the results of the group’s use of the mechanism to particular ends?

I was struck by Will’s “you decide” model -- arguably one of the best attempts at a value-free approach. Whilst loans to individual members do not seem to be the primary purpose of the women’s groups in Tajikistan, they do happen. Would SC be queasy if some of those borrowers on-lent their loans?

How do we react to loans made for a microenterprise that depends heavily upon the borrower’s children as its labour force? Or that produces untreated foul wastewater into the local stream? Or an intoxicating home-brew? Personally, I really dislike the sale of crap packaged snacks I see in all the trading outlets of MFI borrowers that I politely inspect on my cheerleading visits, but having access to them is seen as a major life improvement by local families.

I suspect the answer is to have the group decide if these are acceptable uses of their savings -- i.e. to apply their own values to the situation -- which, in turn reflects the value we place on majority rule and the exercise of property rights.

Now I’m getting a headache and need to rest in a darkened room to try and sort it all out...

Tue, April 26, 2011 | Greg Pirie

Interesting can of worms indeed! 

I really like how you articulated the unspoken 'set of values' that can present itself in the kind of work done with savings and lending groups. How do we react indeed? 

Whatever my personal opinions are and that I've expressed here....I do agree that, in practice, the best approach to take is facilitating the group decision making process and ensuring that everyone has a say in the conversation. That is generally the approach the Training officers take and they do their best to 'coach' and limit their input to one of helping group members examine the pros and cons of a given scenario about the use of the pooled savings, etc. Yet, we often have debates in the office about this type of stuff. 

Now, I hope the darkened room helped and you got rid of the pesky headache!!

Tue, April 26, 2011 | Jill Thompson

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Thu, April 28, 2011 | hon.bruce.williams

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Sat, April 30, 2011 | Jill Thompson

Looks like the first salvo in a classic 401/419 scam to me... What I don't understand is how something that normally arrives as an email has made its way into a blog. The scammer has enough patience to sit and manually enter it, rather than send by automated email?

Sat, April 30, 2011 | Greg Pirie

That's actually not the first - I removed one before. We were originally going to have the comments "curated" or pre-approved to keep that from happening, but then I thought that an occasional viagra ad or opportunity to collect THREE HUNDRED MILLION DOLLARS, THAT MY LATE UNCLE THE FINANCE MINISTER HAD WITH HIM WHEN HE DIED would be bearable. Normally I'd just take it down, but since Hon Bruce Williams is writing from BARCLAY LOAN FINANCE COMPANY in a conversation about outside lending, maybe I should leave it up. 

There is a way to post directly by email, and Hon Williams' computer seems to have stumbled upon it. 

Paul

Sun, May 1, 2011 | Paul Rippey

I kinda like it the humor of it, Hon Bruce's post I mean. It is sort of ironic if you think of it....hmmmm, come to think of it, this could take VSL to a whole new level! I'm sure Hugh would love it (not).!

Sun, May 1, 2011 | Jill Thompson