Project Everest

Customer Segment

[Customer Segment]: Microfinance II Malawi - Profiling Village Banks - July 2019

Through information gathered in our profiling experiment, the Microfinance II Team has identified that our customer segment is village banks located in Blantyre, Malawi. We have found that village banks identify with the problem of inadequate access to finance. This was determined by holding meetings with numerous village banks and analysing data that had been previously collected by the Social Consulting Team in July and December 2018. In total, this information has been validated from data collected from 15 village banks of differing sizes in the Blantyre region.

Overview of village banks

In order to overcome the problem of inadequate access to finance and financial services, communities in the Blantyre region have developed village banks. These informal financial structures bring together members of the community and empower such individuals to invest their savings into the village bank. These savings are continually growing and are distributed amongst the members of the village bank in the form of microloans. The process of managing savings deposits, fund allocation and loan repayments is overseen by an elected treasurer, chairperson and secretary. 

Village banks commonly operate in two 6 month cycles each year - January to July, and July to December - with a one to two week break in between each cycle. The membership of the village bank is subject to change for each banking cycle. The number of members varies significantly between village banks, from around small village banks of around 15 members to large village banks of around 40 members.

Research by the Microfinance II Team and previous Social Consulting Teams has identified that villagers commonly prefer to access village banks rather than formal banks and lending institutions. It has also been determined that village banks have inadequate access to capital to meet the demand of individual members for greater loans and that village banks would like access to greater liquidity to input into the pool of funds. 

Requirements to join (including collateral requirements)

Village banks have differing requirements to join, and this is also subject to change at the start of each six month banking cycle. The different requirements we have observed are: 

  • A joining fee that is paid at the beginning of the banking cycle 
  • Purchasing a chitenje
  • Owning a house in the village
  • No fee/requirement to join

Weekly meetings

Village banks hold weekly meetings, which commonly run for one to two hours. These meetings follow a set structure each week. The meetings commonly start and end with a prayer. The formal procedures used in the village banks that we have interacted with all follow a similar structure. Members will commonly pay a weekly membership fee and contribute to a welfare or sick fund. Following this, members deposit their shares with the village bank and make repayments on current loans. The village bank will then allocate the available funds to members who require a loan. This is commonly determined on a ‘first in, first served’ basis as there is inadequate capital to meet the demand for loans. 

Accounting procedures

Village banks record their accounts on paper in exercise books. There is one book that acts as the general ledger, recording all fee payments, share deposits, loans and associated repayments of the members. Each member has an individual book that records their individual transactions. The secretary is usually responsible for the accounting procedures and ensures the books remain safe. 

Membership fees

The majority of village banks we have interacted with have compulsory fees. These fees change depending on each village bank, but are commonly combinations of deposited amounts towards weekly membership fees, the emergency fund, a sick fund and welfare funds. Weekly membership fees and the emergency fund are commonly used, either separately or in combination, to provide short-term emergency loans each week to members in need. These loans are small in size and a simple interest rate is applied to this loan. It is usually required to be repaid within one week. 

The sick and welfare funds of village banks are used differently. Most village banks have a sick fund that is used to provide support when a village bank member or a family member becomes unwell. Welfare funds may be used to purchase household items for members where necessary. For example, it may be decided that kitchen utensils could be purchased and shared amongst the members of the village bank. 

Interest rates and interest repayment system

The village banks we have interviewed commonly apply an interest rate of between 10% to 30%, with a significant majority applying a rate of 20%. A simple interest rate is applied when a loan is taken out by an individual member. For example, if a loan of 100,000MWK is taken and the simple interest rate is 20%, an interest repayment of 20,000MWK will be applied and the total amount repayable is 120,000MWK. Members will make repayments throughout the six month banking cycle. The village banks use a flexible system that enables members to repay loans at differing amounts each week dependant on their current capacity. The loan, plus interest, must be repaid before the bank closes at the end of the cycle. Once the total amount is repaid, the interest repayments made by the member are returned, which creates a unique system of forced savings. This effectively means that the village banks are using an interest rate of 0%, as no profit is retained.

Default rates and associated social pressure

Village banks have extremely low default rates. This is associated with the high level of social pressure that exists within village banks. Individuals in village banks feel obligated to repay their loans to ensure that the community continues to be supported and ensure other members are able to receive a loan because capital remains at a sustainable level. Low default rates are also the result of financial pressure in some circumstances. Some village banks require members to own a house in the village before joining. This isn’t classified as a form of collateral, but rather acts as a guarantee that an individual won’t leave the village after receiving a loan. Additionally, some village banks have the right to sell household items of members if a loan is not repaid to cover the outstanding repayments. 

In the rare circumstances where a member does default, there are commonly procedures in place that are followed to mitigate this. For example, an extension may be granted to enable the individual to collect the necessary money, or the interest repayments an individual has made could be retained to cover the size of the missing loan repayments (enabling the amount of capital within the village bank to be maintained). 

edited on 19th July 2019, 09:07 by Courtney Dudgeon

Grace Blackford 6 months ago

Status label added: Customer Segment

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