Community Savings Microfinance Model

A new article in The Economist: Small wonder - A new model of microfinance for the very poor is spreading.


From the article:

People like these schemes because they are easy to understand, says John Schiller, a microfinance expert with Plan International. And returns on savings are extremely high—generally 20-30% a year. Borrowers typically pay interest rates of 5-10% a month on loans that usually have to be repaid within three months. The rates may seem usurious but they are set by people who are in effect lending to themselves and saving the interest that they charge. 

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. 

Members select leaders and draft a constitution. The rules spell out how often the group will meet, what interest rates it will charge and what loans may be used for. At the end of a cycle (usually about one year), all the money accumulated through savings and interest is shared out according to members’ contributions, and a new cycle starts. Once members have mastered the system, the groups they have formed can take on additional tasks such as providing training in agriculture, health, leadership and business.