It started in Bolivia. The year was 1984 when John Hatch saw poor Bolivian farmers struggle for capital. With traditional loans being far from accessible due to lack of collateral and cost deterrents, he saw an opportunity that defined microfinance as we know it today.
We at Financial Insight believe that a dual economy exists. But before we get into conspiracy theories of what exists and does not exist in our financial system, understanding the concept that is Village Banking is important.
According to FINCA, a “Village Bank” is basically a group of low-income entrepreneurs who come together to share and guarantee one another’s loans. Their ultimate goal is to become engines of development. Tailored to societies that have “marginalized” entrepreneurs who find financial resource scarce to come by, they offer them an opportunity to invest and grow their businesses.
Little has been documented locally (a google searched gave this from Daily Mail and this from Times of Zambia). The latter story from the Times of Zambia actually discusses some of the mechanics involved in having a functioning village bank. However, little is mentioned about the return on capital employed for these schemes.
To put it into perspective, we considered a comparison that pitted the return on commercial debt for small businesses, the return on treasury bills and the ubiquitous average of village bank interest rates. What we discovered was that for the smaller entrepreneurs, interest rates for business finance become attractive when they are south of 15%. On average most Village Bank interest rates average around 10% per cycle (with slight flexibility on tenure). When compared to commercial debt, average rates are currently above 25% (despite MPC heading south). We deliberately included the Treasury bill which comes in as a medium barometer that when brought in confluence with our current inflation rate makes a very interesting argument as to why Village Bank interest rates are ones to keep an eye especially that they inspire economies of scale.
At present, we believe financial institutions need to closely monitor the progression of Village Banks as they could be the source of the next disrupter in the industry. Backed with a mobile money transfer technology that is ubiquitous to the low income earners (the same demographic that aspire of VB services) this has the making of an extra ordinary financial revolution. We envisage companies such as ZOONA, MTN Money, Airtel Money being the next innovators around this space offering services that allow for seamless movement and transactions of money in this ecosystem. The only threat will be regulation and tariffs. This modus operandi has existed without rules and flourished. Therefore, regulators must nurture it carefully else they risk driving it back to black market. The market always finds its way.