December 19, 2011

A new way to help the poor

According to the Economist, a new model of micro-finance for the very poor is spreading fast through Africa, Asia, and Latin America. The name of the new model is "village savings and loans association" and it is a basic form of banking. It was created by CARE International in 1991 to help the poor save. 2 billion people who live on $2 a day don't have access to banks and the theory is that what the poor really need, if they are to manage their cash better, is savings. And it is harder to save without a bank. Another problem is that the poorest of the poor currently don't have access to traditional micro-lenders. The village savings and loans association is based on savings and is managed by the members of the community. Traditional micro-finance is based on debt.
 "A village savings scheme typically involves a small group (perhaps 15-30 people) who pool their savings. Each buys a share in a fund from which they can all borrow. All must also contribute a small sum to a social fund, which acts as micro-insurance. If a member suffers a sudden misfortune, she will receive a payout." 
The small group has special rules about how often the group will meet, what interest rates it will charge (typically 5-10 percent a month on loans that have to be repaid within three months) and what loans may be used for. 5-10 percent a month may seem high, but remember that they are paying to themselves.
Faustina Kwei in Ghana is currently using this new model and it has helped her to feed her two children and send them to school. She is using a combination of savings, dividends, and loans.

Source: The Economist