Community based financial services are proving to be an effective model of expanding financial inclusion in Zambia and an important step towards its formalisation. Examples of these informal finances include savings groups such as village banking and Chilimba (also called Chamas in East Africa) as well as controversial practices such as Kaloba (lending with interest).
Informal finance can be defined as small, unsecured and short in maturity funding capital for example: sourced from private money lenders (Kaloba), relatives and friends as well as through savings groups and village banking. Community based financial services have been found to be positively associated with firm growth and an important step towards formalisation of these informal finances.
Even though the importance of community based financial services has been widely confirmed, we know little about the types of informal finances.
Therefore, there has been debate on the different types of informal finance, where savings groups were mistaken to be village banking when in fact not.
Interestingly, members of these informal financial groups thought they belonged to village banking groups when it was actually a savings group.
Zambian Financial Sector Deepening (FSD Zambia) Head of informal finance Chipili Mwaba explains the different types of informal finance such as savings groups, village banking, Chilimba and Kaloba.
Ms Mwaba says that each of these groupings are different in the way they are formed and operate, stating that it had been observed that people use these names interchangeably despite their difference, which can be confusing to both the public and individual group members.
“It is important for people to understand and appreciate the different informal financial groups before committing to participate in any of them.
“Understanding these different concepts and how they function as well as the roles and responsibilities of the members, will help alleviate fears and risks of getting defrauded. It willalso promote better participation and accountability from members,” Ms Mwaba said. She explained that the savings groups are self -selected groups of people comprising of members between 10 and 25 who meet regularly to save money and borrow from the group savings, according to rules established by that particular group.
According to FSD Zambia, members can save varying amounts and borrow up to three times their savings payable over a period of one to three months.
She said savings group’s members often borrow to help build businesses, smooth income, and support livelihoods.
Savings groups have proved to be instrumental in propagating financial inclusion, particularly among rural women who tend to be most vulnerable to economic shocks; have little or no savings and tend to lack access to affordable credit and financing options.
Ms Mwaba indicted that village banks are informal microlending groups comprising of like-minded people who know each other and get together to access a loan, using funds which come from an institution or the government.
Village banks are comprised of five members who jointly guarantee the repayment of any individual within the group.
In Zambia, village banks are implemented by the Government through the Ministry of Community Development and Social Services. Village bank loans are revolving funds which after being paid back are given to another group within the community.
On the other hand, a Chilimba is a type of Rotating Savings and Credit Association (ROSCA). Chilimba is indigenous and it is the most widely used method of informal group savings in Zambia.
In a Chilimba, members make regular fixed contributions to a common fund in each meeting in a predetermined order. The total common fund is then given to each member in turn.
According to FSD Zambia, Kaloba is informal credit offered by moneylenders (also called shylocks) to clients within their communities. It is a quick way to get credit without necessarilycontributing any savings to the service.
FSD Zambia further indicated that terms and conditions for Kaloba vary, and they may or may not include written agreements and collateral. Kaloba is an agreed plan between the shylock money lender) and the borrower.
Therefore, given the value and importance of savings groups to communities and the serious potential negative impacts on their operations, health, social and economic wellbeing of the over 800,000 savings group members in Zambia owing to Covid-19, FSD Zambia in 2020 published recommendations to guide savings groups’ functions and keep members safe.
The guidelines will support the sustainability of savings groups in different communities during these difficult times.
The guidelines includes reducing meeting times for example, instead of weekly, savings groups can meet once a month and encourage only a few members to attend meetings to avoid overcrowding especially if meetings are held in a small room.
Within the guidelines provided by FSD Zambia, group members are supposed to practice social distancing – sit at least one metre from each other emphasizing on the need to avoid shaking hands or hugging.
In the guidelines, members are encouraged especially those in high risk categories like the elderly, pregnant, sick or have preexisting health conditions such as diabetes, asthma, bronchitis, cancer and HIV to appoint a relative or friend they trust to participate on their behalf.
Members should also avoid coming to the meeting with children.
As a health safety measure, members when holding meetings should enforce hand washing; provide a hand washing bucket or container with soap/sanitisers for members coming to the meeting.
If gloves are not available, use hand sanitisers before and after the meeting.
FSD Zambia guidelines state that members especially moneycounters should not touch their faces when counting money. If all members have cell phones, FSD Zambia suggest that members should have a digitised meeting where members send savings, loans and social fund through mobile money or other virtual means. This could be safe but requires that all members learn how to do this properly.
The guidelines also give an insight into how Financial Service Providers (FSPs) and Mobile Network Operators (MNOs) can use this as an opportunity to leverage formal linkage and develop products that are convenient and meet the security needs of the savings group members during this period and beyond.
FSD Zambia will continue supporting the efforts to expand savings groups and encourage women participation to provide more women access to financial services offered by savings groups.
Furthermore, FSD Zambia collaborated with ZICTA and MNOs to promote digital financial transactions to avoid members handling cash which could be a conduit for the coronavirus.
FSD Zambia recognises some of the infrastructural challenges members face in accessing digital financial services such network signal, electricity and cell phones.
To address this, FSD Zambia will work with partners to explore ways to increase digital financial services by distributing cell phones and solar chargers to savings group members in rural areas.
FSD Zambia chief executive officer, Betty Wilkinson said Covid-19 was a nightmare for everyone but in particular lowincome families.
Savings groups are an effective method of providing savings, borrowing, and self-insurance for low-income families in Zambia.
“FSD Zambia cares deeply about our people. We thus assessed some ways to make sure that under the harsh economic circumstances of Covid-19, savings groups can still help their members stay safe and manage their money even more carefully than usual,” Ms Wilkinson said.