[Customer Segment]: SoCon Malawi - Village Banks - July 2018

by

Kurt Michl | 11 months ago | in Knowledge Base

In Malawi, we have come across the term Village Bank quite a bit, and we had made some assumptions surrounding how they work. Over the course of July, we have had several meetings with three different village banks, and have been able to develop a good understanding of how they function and the possible avenues for growth associated with their structure. 

These village banks are very common across Malawi, we are told, and just in our study region of Nancholi, there are more than twenty. 

The banks which we have visited work as community pool of money. They are compiled of savings of around 45 different individuals across 6 different villages. The bank is managed by an elected treasurer, a chairwoman and a secretary. The individuals (members) can invest their savings into the village banks. This money will be loaned out in the form of micro-loans and will accumulate interest. Every six months, the banks starts the process again, and the contributors have the opportunity to withdraw their accumulated savings, or reinvest it. 

To be a member of this particular village bank and be able to deposit or borrow, there is a weekly membership fee of around MK 300 (approx. $0.60 AUD). In one of the village banks,  MK 250 (approx $0.50 AUD) of this membership fee is allocated to social uses and the running of the bank (such as pens, papers, reserves, or a communal asset for the group...), and the remaining MK 50 (approx. $0.10 AUD) is allocated to a social fund which will be used to pay for gifts in the case that a member falls sick. To remain a member, one must agree to the terms, which are paying these fees weekly, and paying MK 100 (approx. $0.20 AUD) if one is late, or misses a weekly meeting. 

Any individual can input more, which will go towards their personal savings however, this is not compulsory. The deposited amounts will be loaned out and will accumulate interest over the term of the loan.  

The loans that are handed out by one particular village bank (at NAYO) are characterised by: 

• loan life of one month, with possibility of a one month extension
• maximum loan amount of MK 20 000 (approx. $40 AUD) 
• average loan amount of MK 5 000 - MK 10 000 (approx. $10 - $20 AUD)
• interest rate of 20% per loan 
• extremely low default rates (if the individual cannot repay the loan within 1 month, they are given 4 weeks extra. This always works, they say.).

The loan terms of other village banks are slightly different in regards to size of loan and duration of the loan, though they are all very similar so far. 

The creditworthiness systems they have in place are very qualitative, and rely strongly on the communality of their operations. They will only loan to people who are members of their village bank, and who ave paid all of their fees. However, to be eligible for a loan, an individual must have an equivalent amount of savings, which can show that they are able to save, and may be more likely to repay the loan effectively. For a different village bank, the amount of savings required half of the loan amount. Regardless of this difference, we can clearly say that an important aspect of credit-worthiness will be showing one's ability to save. 

The village bank provides loans to its own financial capacity, and this determines the amount of loans the bank has at any one time. However, it was explicitly stated that the supply of loan they can sell does not begin to meet the demand for loans in their community. As mentioned, loans are handed out weekly, and all deposited funds are loaned out. The amount that can be loaned out, is therefore dependent on the amount which has been deposited each week. 

A very interesting, and beautiful, aspect of this system is that over the six month period, although weekly deposits may not change in amount, because funds cannot be withdrawn the amount of capital is constantly growing. As such, loans can become larger or more numerous. What is more, is that if all loans are repaid with interest (and there is no proof to say otherwise), the available capital increases even more so. 

It was explicitly state that the maximum loan amount hat they provide (MK 20 000) would not be enough to open a shopfront business, and that an ideal amount would MK 200 000 (approx. $400 AUD). If this bank had access to larger amounts of money, they said that they would not provide more loans, but larger loans, which could be more effective. It would be interesting to see if such structures would withstand larger scale of capital. 

Although we have been referring to them as village banks, my interpretation would lead me to believe that they should rather be called savings funds, which provide loans to generate income for their fund. When asked if the primary purpose of this bank's existence was for savings or community, they instantly responded saying that is a community. The focus is very much on helping each other improve their lives, and the medium through which they are doing this is informal banking. It is an interesting structure that has developed organically, with a very communal purpose. In the weekly meeting they hold, they will share ideas on how they could improve each others' businesses, and they will hold cooking classes and such, simply to improve each others' lives.

We are to believe that there are many similar institutions in areas where people are formally unbanked, which in Malawi is a very large proportion.  

 Opportunities

• There may be opportunities in an educational setting, which could improve the performance of their funds.
• We could replicate their operations using them as a middle-man (perhaps on commision), as a method to get started in the "micro-financing game", as they already have these systems in place. 

https://projecteverest.crowdicity.com/post/575777 

https://projecteverest.crowdicity.com/post/578369

https://projecteverest.crowdicity.com/post/575802

These village banks could be our customer, our channel, or both.