On Tuesday, our group visited an organization called Reach Out to learn about microfinance and to sit in on community microfinance groups. Reach Out was originally started to combat HIV/AIDS and provide support to patients, but in 2009 they started a microfinance operation to help the extremely poor save money. Microfinance is almost like a small bank, but for people who cannot provide collateral for a loan. These small groups, called VSLAs, are comprised of 15-30 people. The general purpose of these VSLAs is to help poor people, especially women, save money and be able to access small loans efficiently. It's important that the members within the group know each other, because the incentive to pay back the loan is social pressure. In essence, you don't want to be embarrassed in front of a group of your peers by not paying back the loan. I said before that the small group is like a bank; everybody contributes savings at weekly meetings, and loans (usually four week loans) are then given out within the group. The interest repaid on the loans is then distributed equally among group members at the end of a 12 month period.
We were fortunate enough to be able to sit in on two weekly meetings for local VSLAs. They showed us how a meeting operates, and all of the bookkeeping work they do. Reach Out has created over 300 of VSLAs similar to the ones we sat in on, and the groups have been extremely successful, with a default rate of only 3.4%!
Food for thought:
Why do you think social pressure is a good enough reinforcement for these systems to work?
What are some issues the developing economy of Uganda could run into if dependence on microfinance were to develop?