projecteverest

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

by
Kurt Michl
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. 

edited on 8th January 2019, 10:01 by Ella Grier

William Lee 11 months ago

Hey Kurt, is there a way to digitise some of the process involved here? Especially around bookkeeping - I imagine if you were able to digitise the financial data that is generated from these systems, it could have potential use cases for credit scoring for greater loan amounts. So, this communal system would act as the initial introduction to the loan market - and as we learn more about their ability to save through these ‘village banks’, we can start to understand each persons credit risk in more detail. This data can be sold onto bigger financia institutions who can lend more capital than village banks, and the credit score will lower the interest rate being charged to these individuals. They are just some initial thoughts - would love to get your feedback.

Reply 0

Kurt Michl 11 months ago

Hey Will, i absolutely love this idea!
I think what would be required would be to gain access to their past ledgers and physically digitise it ourself. This would then be marketed to companies such as Finka, as well as banks. If this information did prove to be useful and marketable, it may become cost effective to invest in digital products that we could "sell/loan/give" to the village banks and teach them how to use the "accounting software" in exchange for giving us access.

So I think the steps towards an MVP would be scoping out whether or not this type of credit information would be valued by banks/MFI etc. then if yes, then go to the village banks and ask for further access to the data base.

What do you think?

Reply 1

William Lee 11 months ago

Yeah, absolutely agree that those would be the two key steps moving forward.

With regards to approaching banks/MFIs, an important thing to ask about would be how they currently score credit, and if there are gaps in their data sources. So, for example, how would they go about assessing a villager's creditworthiness at the moment? What data sources do they currently rely on? What could help them underwrite more loans with greater confidence? I think if you went down that line of questioning, and pitched this idea to them as a solution, it could generate a good amount of interest in the idea from them.

With regards to village banks, the question to ask would be: how detailed is the bookkeeping currently? Is it weekly records? If someone had received multiple loans, would you be able to trace back those loans to a single individual or are they recorded anonymously as independent transactions (hypothesis here being that proof of multiple successful repayments suggests strong creditworthiness)?

Let me know your thoughts - and feel free to reach out to me directly if you want to discuss this in more detail.

Reply 0

Kurt Michl 11 months ago

fantastic! We have actually already had some access to the record keeping system of one village bank, and we are hoping to get access to two others' next week.
As for formal institutions, we expect to get some responses to those questions today.

Thanks Will, I will keep you posted :)

Reply 0

Ella Grier 11 months ago

In addition to this, it would be interesting to get an idea of how the village bank system is currently integrated with the official banking networks of Malawi, as you go about validating some of these assumptions.

The two village banks that I've spoken too in Nkoka region actually bank their funds at National Bank Malawi, with the treasurer going to withdraw/deposit necessary funds before the meeting each week. If your end product was a platform around book-keeping, digitising financial data and developing credit scores for these village banks, then your customer could be the banks themselves, to have a system to incentivise more of the Malawian community to be registered with national banks.

Reply 1

View all replies (4)

Mallory Dobner 11 months ago

Is there a process that regulates what the loan is used for? In terms of creating good debt as well as savings literacy it seems like a system that advises its people on what to use loans on rather than just giving the loans would be more effective.

Reply 0

Kurt Michl 11 months ago

There definitely is room for some sort of educational intervention in this particular village bank.
This village bank doesn't have strict regulation on what the loan can be used for, though part of the process of the weekly meeting they hold is to try and give insight into each others' businesses. It is a very loose form of education, and they did express need for further education. I agree entirely that further education on good investment of funds, and business practices would be useful, though they do seem to already have a basic understanding of what is necessary.

W were told the the loans are used for business inputs, but it not a strict regulation. We have been told that at different village banks, the loans can be used in case of sickness.

Reply 0

Mallory Dobner 11 months ago

It seems like education of the chairwomen of village banks could be one potential path to go down. Through educating one person that is then able to educate those around them you would be able to create an effective trickle down effect.
I think it is important to keep the social aspect there of letting people use loans to get them out of hard times, but it would be interesting to see if you were able to manipulate it in the future so that it is getting people ahead, not just getting them through.

Reply 1

View all replies (2)

Wade Tink 10 months ago

Great post Kurt and I would categorise it as a 'Customer Segment'. However, you stated that you had only spoken to 3 village banks and thus you need more engagement to really validate your findings.

From the section "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...." You are going to define the problem of this customer segment- this warrants a separate post IMO which specifies that aspect. In this area it would be great to identify how the village banks (by speaking to more of them) are currently solving the problem of lack of capital. Is there anything beyond accruing capital internally?

As a channel to reach individual borrowers this makes sense however the experimentation you have proposed is to lend to the village banks directly so I think it warrants 'customer segment' & 'problem' for now.

Reply 0

Wade Tink 10 months ago

Status label added: Customer Segment

Reply 0

Ella Grier 5 months ago

Status label removed: Customer Segment

Reply 0

Share