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Series 1, Note No. 5
" L i v e l i h o o d s L e a r n i n g "
Community-managed Microfinance
� A New Model from Sri Lanka
Meena Munshi, Anne Ritchie, and Ajai Nair
TheVillage Savings and Credit Organization (VSCO) is a community-managed microfinance organization developed
in Sri Lanka under the Community Development and Livelihood Improvement Project or "Gemi Diriya.1 VSCO is
the financial services arm of the community-run Village Organization, which has the mandate of overall economic
and social empowerment of the village, particularly the poorest. Within the short 2-3 year period of time since
project inception, many VSCOs have demonstrated that they can provide a range of financial services demanded by
their members while adhering to global standards of performance.
This note describes the context under which the model was developed, identifies some key features of the model and
outlines the benefits the system currently provides. Although it is too early to draw inferences on performance and
impact of VSCOs, it is hoped that this note provides some initial lessons for interested stakeholders.
The Context not envisage having a microfinance component. The
project expected the communities to use the funds
The outreach of microfinance in Sri Lanka is provided to create social infrastructure such as roads
impressive when compared to many other developing and water-supply. However, there was consistent
countries. A study conducted by CGAP finds there demand from the participating communities for
are 15 million deposit accounts and 2 million micro financing to support livelihoods-related activities.
loan accounts in a country of 20 million population.2
This is also corroborated by recent household survey Contrary to the common perception that poor
findings that 78 percent have access to credit and 75 communities expect grants or "hand-outs" from
percent have access to savings; 66 percent have access Government funded projects, these community
to both.3 However, a significant percentage of the members were seeking sources of credit to improve
population remains without access to formal financial their livelihoods. However, banks were seen as too
services and, even among those with access, the quality distant and unwilling to provide credit to the poor and
of that access is poor. loans provided by Microfinance Organizations were
available on prohibitive terms and conditions. As a
When the project's Village Self-help Learning result, borrowing from moneylenders at interest rates
Initiatives (VSLI) pilot was started in 1999, it did as high as 25% per month was prevalent.
1 Gemi Diriya in Sinhala means "village strength".
2 Duflos and others (2006).
3 The Institute of Policy Studies (2005). The Survey interviewed 1,500 households from 50 Grama Niladhari divisions across 17 districts in Sri
Lanka. The two largest providers are the Samurdhi program, the Sri Lankan government's social welfare program, and SANASA, the financial
cooperative network. Samurdhi offices are present in all Gram Niladhari Divisions and all villages have a Samurdhi worker.
2 Livelihoods Learning Series 1, Note No. 5
The project management decided, therefore, to out activities prioritized by it. VOs are registered as
experiment by giving a Revolving Fund of Sri Lankan "People's Companies" under Sri Lanka's Company's
Rupee (SLR) 100,000 (US$ 923)4 to six villages. The Act (No.17 of 1982) and are governed by a General
results of this experiment were varied. Some village Assembly and Board of Directors (BOD). VOs receive
communities simply distributed the money among facilitation, training, and technical assistance from
the villagers without any rules or guidance. Other the project to enable them to plan and implement
communities developed some rules and procedures for activities in a participatory manner that includes
the use of the money, but these were still inadequate to women, youth, and the poor.
ensure sustainable performance of the fund. Following
this, the project facilitated a participatory design VOs receive a Village Development Fund based on the
process to address the shortcomings of the different total population of the village.6 The VO then decides
approaches used and developed the Village Savings and to allocate this fund among three components. The
Credit Organization (VSCO) model. This experience Capacity Building Fund is used to build capacity of the
under the VSLI pilot was then scaled up under the VOs and to maintain the VO offices; the Infrastructure
Gemi Diriya program. Fund is used to create village infrastructure - such as
roads and water supply - identified by the community
The Gemi Diriya approach supports the efforts of as its highest priorities; and the Livelihood Fund is
rural communities to identify, prioritize, and take used to support livelihoods by providing loans for
action to meet their development needs by investing farm and non-farm activities, facilitating input and
in autonomous organizations such as Village output linkages for economic activities, and providing
Organizations (VO) and their District Federations.5 one-time grants to the poorest. VO members have to
The VO receives funds from the project and carries
4At an exchange rate of 107.61 at the end of 2006.
5The project is funded by the World Bank and implemented by the Gemi Diriya Foundation under the Ministry of Nation Building and Estate
Infrastructure Development.
6Currently, the amount is calculated at the rate of SLR 6000 (US$56) per individual in the village.
Livelihoods Learning Series 1, Note No. 5 3
contribute at least 30% of the project costs in cash and Services Offered
labor for using the Infrastructure Fund.
VSCOs offer both savings and credit services. The two
As of December 2007, 866 VOs had been established savings products are compulsory savings and voluntary
by Gemi Diriya, with more than 80% of households savings. Each SG decides the amount of compulsory
becoming members through purchase of VO shares. savings � they often range from SLR 30 to SLR 150
Of the poorest households, 93% had become members per month � and this allows even the poorest to join
of their VOs. Women held 60% of the decision- SGs.
making positions on company Board of Directors and
The second main savings product is `normal savings'.
youth held 38% of positions. VOs have funded nearly
This voluntary savings product enables members to
400 infrastructure projects.
save additional funds according to their means and
needs. This savings is not lent out and is collected and
Village Savings and Credit
deposited into banks. In addition, some VSCOs have
Organizations developed additional special savings products such as
The savings and credit activities of the VO are Loan Security Fund.
implemented by the Village Savings and Credit
Organization (VSCO). VSCO is a three-tier entity, Box1: Building up Savings
which is embedded within the VO but operates Lalitha Padmakanthi is a member of the
autonomously. VSCOs provide savings and credit Kabillegama VO. She saves regularly in her SG
services to VO members. To obtain these services, VO and has accumulated a compulsory savings of SLR
members have to become members of savings groups 2700 and a voluntary savings of SLR 5000.
(SGs) and adhere to the rules and regulations of the
VSCO.
Figure 1: Village Organization
Company
B oard of Directors
S avings and Credit
Sub-committees
Organization (VS CO)
C lus ter
Small Groups
Households
4 Livelihoods Learning Series 1, Note No. 5
Two main credit products are offered � one by the manage SG activities and to represent the SG; they
SGs (called `instant' loans) and the other by the VO serve for two years. The treasurer maintains the
(termed `project loans'). SG instant loans are made accounts for SG compulsory savings and the lending
by the SGs from the group's compulsory savings; and of those savings.
Village Savings and Credit Committee (VSCC) loans Clusters are formed from a maximum of 6 SGs.
are made from the VO revolving fund. SG loans can The Cluster Committee (CC) is composed of the
be for any purpose, while loans from the VSCC are chairpersons and treasurers of each SG. The CC elects
only for improving the livelihoods of members. They a Cluster chairperson, secretary and a treasurer to
can be used for both the start-up and expansion of manage CC activities. The CC treasurer maintains the
economic activities. The SG itself determines the size, accounts for the voluntary savings of the SG members,
interest rate and repayment period of SG loans, and and the CC banks those savings in a CC bank account
makes all decisions concerning these loans. VSCC used exclusively for this purpose.
loans have terms established by the VO that owns the
funds, and a decision-making process controlled by the A Village Savings and Credit Committee (VSCC),
VSCC. which is the highest level of governance within the
VSCO, is formed by the chairpersons of the clusters,
Organizational Structure as well as two representatives of the VO's BOD. The
VSCC manages the loan fund owned by the VO.
Figure 1 shows the organizational structure of the Prospective borrowers must have a viable business
VSCO. The basic unit in a VSCO is the Savings plan, on-time repayment of previous loans, regular
Group (SG). An SG consists of five to seven members. savings within the SGs, and savings of at least 10% the
The members elect a chairperson and treasurer to value of the loan.
Figure 2: VSCO Structurev
GEMIDIRIYA MODEL � SRI LANKA
Key
C=Chairperson Bank
T=Treasurer
People's Company Link-
age
6 C + 2
Village Savings and Credit Committee (VSCO) Members of
Company BOD
Savings
Group Cluster Committees Bank
Link-
age
6 C + 6 T 6 C + 6 T 6 C + 6 T
C C C
C T T T
C C C C
T
C T T T T
C T C
C C C C
T T
T T T T
KEY FEATURE: BOTTOM UP GOVERNANCE STRUCTURE
Livelihoods Learning Series 1, Note No. 5 5
Box 2: Participatory Process of VSCO Table 1: VSCO Performance (December 2007)
The SGs meet on a weekly basis. During these Particulars Performance
meetings, they deposit their compulsory and Members in SGs 117,416
normal savings, take instant loans, make instant
Savings mobilized 106.50
loan payments if they have outstanding loans, and
apply for project loans. SG Loans Issued 44.80
The CCs meet monthly. During this meeting, VSCO Loans Issued 602.40
the CC treasurer collects normal savings from the Interest Income 46.60
SG treasurers and arranges for savings withdrawal,
Portfolio at Risk (30 days) on 2.80 %
if any. The CCs review performance of SGs and
VSCO Loans
agree on whether to forward applications received
for project loans to the VSCC. After the meeting, Amounts in Million SLR- Sri Lankan Rupee
the CC treasurer deposits the collected normal
Box 4: Pahala Elleweva VSCO � Reaching
savings into its bank account. many with little resources
The VSCCs meet monthly. During these meetings
The Pahala Elleweva VO received SLR 1.9 million
they make decisions on project loan applications
through the Livelihood Fund in two installments
that have already been appraised, plan for appraisals in 2003 and 2004. In the four years since
of new loan applications, and review performance receiving the first installment, Pahala Elleweva
of outstanding loans. In most VSCOs, project VSCO has provided nearly SLR 10 million in
loan borrowers can make loan repayments on any loans and earned a net profit of SLR 733, 245.
day of the week since the VO office is kept open This translates to a credit generation of over
daily; some have fixed dates for repayment. 500% and capital generation of 39% over the
initial investment (annual Return on Assets of
Performance approximately 11%).This revolving mechanism
has proved a means to convert a limited resource to
VSCOs have achieved significant outreach and
benefit a larger number of people.
financial performance within a short period. Table
1 gives the performance of VSCOs as of December
2007. The Portfolio at Risk (30 days) indicator, which Several VSCOs have shown excellent financial
refers to all outstanding loans that have payments that performance (Box 4).
are overdue by at least 30 days, is well within the limit
of 5% which is considered to be international best Innovative features of VSCOs
practice.
User management: VSCOs are owned and managed
by VO members who use VSCO services. Members
Box 3: Facilitating Business Expansion
determine savings norms and loan norms � amounts,
Deepika Ratnayake is a member of the Wasipanna interest rates, payment schedules, etc. The broad
VO. Her husband is a carpenter and the family participation in VSCOs � over 60% of households in
the project villages participate � makes VSCOs truly
runs a furniture business. Deepika has taken four
community-managed microfinance organizations.
loans from the Wasipanna VSCO to grow the
family business � 1st SLR 5000, 2nd SLR 10,000, Embedded Autonomy: The VSCO is not a separate
legal entity; it is a self-managed part of the VO
3rd SLR 15,000 and 4th SLR 30,000.
that is responsible for savings and loan operations.
6 Livelihoods Learning Series 1, Note No. 5
These operations have been separated from other Graduation of the poorest: Gemi Diriya allocates a
operations of the VO because experience in many portion of the Livelihood Fund for the provision of
countries has demonstrated that multi-sector one-time grants of value SLR 5000 to 10,000(US$46
organizations must clearly distinguish financial to US$92) for income generation to the poorest of
service activities from other activities such as the poor. This enables communities to help those
infrastructure development. Furthermore, within with few assets to get started on an economic activity
a VSCO, the SG, the Clusters, and VSCCs also without the risk of a loan. The VO works with the
operate autonomously in their respective domains poorest to help them develop a plan for a viable
while being embedded in each other. The income generating activity before issuing the one-time
representatives from the VO Board of Directors grant. The grantee is expected to be an SG member
in the VSCC helps to ensure that the loan fund and to be saving regularly. Being an SG member gives
owned by the VO is managed responsibly, thereby grantees an opportunity to save additional income
maintaining its full value over time. generated, provides a support group of similar people
striving to move out of poverty, and most importantly,
Balancing safety and returns to savings: Most the possibility for future loans to scale up an existing
community-based savings and credit organizations economic activity or to start a new activity.
use all the savings collected for lending purposes.
This practice puts savings at risk if loans are not Risk-management: A Loan Security Fund, created
being fully repaid. However, when the poor save at the VO level by a 1% fee paid by project loan
at banks, they often receive low interest rates on borrowers and a 2% contribution by VSCO from
those savings, and the savings do not enable them to interest income, is used to write off the loan in the
improve their access to loans from these institutions, case of a member's death. The Fund also pays for
forcing them to borrow from moneylenders at the funeral expenses of the borrower. Gemidiriya
exorbitant interest rates. VSCOs strike a balance by field staff report that the existence of this fund is the
using compulsory savings � which are the same for most significant factor in attracting VO members to
all members of an SG � for lending, but banking participate in VSCO activities.
the normal savings, which vary according to the
means and the desires of individual members. VSCOs Benefits
establish relationships with banks so that members VSCO provides a simple and community friendly
can get higher interest rates on their savings through source of financial services for rural communities.
fixed deposit instruments, and gain access to bank
loans when they have established creditworthiness Providing an opportunity to save safely: VSCOs
through on-time repayment of their VSCO loans. increase the number of people who have access to
Also, by keeping management of normal savings at saving facilities in formal financial institutions. By
the Cluster level, where records and bank balances placing their normal savings with banks, VSCOs are
can be inspected by SG officers on a regular basis, providing an opportunity for the rural poor to save
the threat of savings mismanagement is significantly safely. Further, there is a reduction in transaction
reduced. costs of traveling long distances to Banks. VSCOs are
increasing incentives to save and are encouraging a
regular savings habit.
Box 5: From Destitution to Entrepreneurship
Providing timely credit at reasonable terms: VSCOs
Sumanadasa is a member of the Wewatana VO. are offering credit that responds to the needs of VO
She got a grant of SLR 5000 in 2006 to start a members and is tailored to the complexities of rural
micro-enterprise making and selling small packets lives, at terms that are decided by the users themselves.
This contrasts starkly with the high interest rates and
of groceries such as tea, lentils and sugar. As the
exploitative terms of credit offered by money lenders.
enterprise has done well, she has recently taken a The `instant' loans provided by Small Groups address
loan of SLR 5000 to expand the activity further. small and emergency credit and `project' loans address
Livelihoods Learning Series 1, Note No. 5 7
Box 6: Financing Agriculture, dominated mostly by rich men is now being handled
by women.
Kalukala VSCO has been issuing loans for paddy
cultivation for the past four paddy seasons. The Vision for the Future
loans are issued at the rate of SLR 15,000 per
VSCOs as a source of revenue to sustain VOs: Some
hectare of paddy cultivated. The loans have to VOs have already decided that a portion of the
be repaid in one installment after 7 months. In VSCOs profits will be transferred to the VOs to be
the most recent season, 129 farmers borrowed. used as development expenditure. This can become
Access to credit from VSCO has allowed farmers a sustainable source of revenue for VOs, once
development funds provided to VOs by Gemi Diriya
to depend on their own community organization
for infrastructure and capacity building are exhausted.
rather than on advances from traders that have This is critical since the mandate of the VO to help in
to be repaid by selling back paddy at discounted the social and economic development of its members is
prices. unlikely to be achieved within the project period.
Ensuring the sustainability of VOs through federations:
credit needs for livelihood improvement. VSCOs VOs are already starting to form federations as a means
provide financial services to their members that are to leverage economies of scale and create sustainable
often not available from other sources. The economic access to support services. The financial services arms
impact of timely and adequate access to credit at of these federations are expected to provide support
reasonable terms can be significant. Credit offered for services to VSCOs.
seasonal agriculture needs by several VSCOs is a good
example. Achieving Financial Inclusion: The formal financial
system consisting of private and public banks, and
Empowerment: Managing a financial institution of other non-bank financial institutions in Sri Lanka,
their own is a source of pride and self confidence find it difficult to expand their outreach into rural
to the communities. The domain which was earlier areas and among the poor. Even publicly-owned
8 Livelihoods Learning Series 1, Note No. 5
banks, which have a mandate to do this, find it hard References
to extend outreach to poor people cost-effectively.
Duflos E., Ledgerwood J., Helms B., Moyart M. 2006.
VSCOs are already helping them partially achieve their
Country-Level Effectiveness and Accountability Sri
mandate by banking some of the savings collected. In
Lanka. Washington: CGAP.
the future, VSCOs can further help banks broaden
and deepen financial inclusion by partnering with Institute of Policy Studies.2005. Microfinance Survey
them in other financial services such as credit and 2004. Colombo, Sri Lanka
insurance. Some banks have already expressed interest
in establishing linkages with the VOs.
Series 1. Note No. 5. December 2007.
Vijay Mohan is the Director of Food Security, Society for Elimination of Rural Poverty, Hyderabad, India.
Vijaysekar Kalavakonda is a Senior Insurance Specialist, Finance and Private Sector of the World Bank.
Shweta S. Banerjee is a Junior Professional Associate and the Learning Coordinator for the Rural Livelihoods
Program, South Asia Sustainable Development of the World Bank.
Meena Munshi a Senior Economist in the South Asia Sustainable Development of the World Bank
Anne Ritchie is a consultant working on micro finance at the World Bank
Ajai Nair is a consultant working on micro finance in the Agriculture and Rural Development Department
of the World Bank
This document was edited by Shweta S. Banerjee and Natasha Hayward of the World Bank
"Livelihoods Learning" Note Series is published by the Rural Livelihoods Cluster in the South Asia
Sustainable Development Department of the World Bank, 1818 H Street NW, Washington DC 20433,
USA. For additional copies contact livelihoods@listserve.worldbank.org
The findings, interpretations, and conclusions expressed in this note are entirely those of the author(s) and
should not be attributed in any manner to the World Bank, to its affiliated organizations or to members of
its Board of Executive Directors or the countries they represent.