VSLA Loans

Village Savings and Loan Associations (VSLAs) allow members to access small loans from the group’s collective savings. These loans are designed to support members’ short-term financial needs and are governed by group-agreed rules to ensure fairness, accountability, and sustainability.

This provides members with access to quick and flexible loans for urgent personal or business needs—without the bureaucracy, high interest rates, or collateral requirements associated with traditional banking systems. This helps strengthen financial inclusion and supports income-generating activities among members.

Purpose of Loans

VSLA loans are typically used for:

• Farming inputs (seeds, fertilizer, tools)
• Business capital (stock for trading, equipment)
• Household needs (school fees, medical bills, emergencies)
• Other personal development activities as approved by the group

Loan Application Process

• Request During Meeting: Members apply for loans during scheduled VSLA meetings.
• Group Approval: All loan requests are subject to group discussion and approval through majority vote.
• Loan Record: Approved loans are recorded in the digital platform.

Approval Process

The goal of the loan approval process is to maintain fairness, transparency, and prevent over-indebtedness. This process is governed by the group’s internal rules and structure, typically involving:

• Elected leaders (Chairperson, Secretary, Treasurer) reviewing the loan request.
• In some cases, a vote or consensus among members is required, particularly for higher loan amounts.
• The approval process often considers the member’s repayment history, current shareholding, and existing outstanding loans.

Loan Amount Determination

The amount a member can borrow is directly linked to their shareholding, which serves as a form of social collateral. The maximum loan limit is determined by the group’s available funds and agreed policies.

• Most groups cap loans at 2x to 3x the member’s total shares.
• For example, if a member holds GH₵100 in shares, they may be eligible for a loan of up to GH₵300.
• This ensures members remain financially responsible and prevents loan defaults that could affect the entire group.

Interest Rates

Loans attract a flat-rate interest, which is predefined in the group's constitution or agreed upon at the start of the cycle.

• Typical rates range from 5% to 10%, applied once on the principal, regardless of the loan term.
• For instance, a GH₵100 loan at 10% flat interest will require GH₵110 total repayment.

This structure is simple to understand and manage within the group context, and interest earned contributes to the group's overall profit pool shared at the end of the cycle.

Repayment Terms

Repayment schedules are generally short-term to ensure liquidity within the group:

• Common repayment periods range between 1 to 3 months
• Repayment is usually made during weekly or biweekly meetings
• Groups may allow early repayment without penalties

Failure to repay on time may result in:

• Fines
• Suspension from accessing future loans
• Affected profit share at the end of the cycle

Loan Requests Near End of Cycle

In the VSLA model, operations run in clearly defined savings cycles, typically lasting 8 to 12 months. At the end of each cycle, all available funds are distributed among members based on their shareholding—a process known as the share-out. One key rule is that all outstanding loans must be repaid before the cycle ends. This ensures a clean closure of financial activities and protects the group’s pooled funds.

What If Loan Tenure Exceeds Remaining Cycle Time

A loan tenure that extends beyond the remaining duration of the cycle presents a significant risk:

• The borrower may not repay after the cycle ends.
• The group may disband, reconfigure, or lose the ability to enforce repayment.
• The shared funds may be reduced or delayed due to unrecovered loan balances.

Resolutions

Automatic Denial or Adjustment

The system can automatically reject loan requests where the repayment schedule would surpass the cycle end date. Alternatively, it may:

• Shorten the tenure to match the remaining months.
• Reduce the loan amount to a level that is repayable within the adjusted period.

Group-Level Overrides (Risky)

In exceptional cases, some VSLAs may approve loans that extend into the next cycle, but only if:

• The borrower has a guarantor or is a highly trusted member.
• The group constitution explicitly allows such arrangements.
• The full repayment is scheduled before the share-out date, not the technical cycle end.

Disallow share-out finalization until all loans are repaid or accounted for.

All loans must mature within the current cycle.
This maintains the integrity of the VSLA model, protects members' contributions, and ensures that the group ends each cycle without outstanding liabilities.

Standardization of Loan Terms in VSLAs

In most VSLAs, loan interest rates and tenures are standardized across all members within a savings cycle.

• Interest Rate: A fixed flat-rate interest (e.g., 5% per month) is established at the beginning of the cycle. This rate applies uniformly to all loans disbursed during the cycle.
• Loan Tenure: A maximum repayment period (e.g., 1 to 3 months) is also agreed upon in advance and is applicable to all loans.

These terms are typically captured in the group's constitution and reviewed at the start of each cycle.

Purpose of Standardization

The standardization of loan terms serves several key purposes:

• Fairness: All members are subject to the same financial terms, reinforcing equality within the group.
• Simplicity: Easier calculation of repayment schedules and interest across multiple members.
• Transparency: Reduces the risk of bias or favoritism in the loan approval process.
• Accountability: Streamlines tracking, enforcement, and reporting of loan agreements.

Exceptions and Flexibility

While rare, some groups may allow exceptions under special circumstances:

• Adjusted Loan Tenure: Slight variations in repayment period may be granted based on a member's request or repayment capacity.
• Approval Required: Any exception must be approved by group leaders or the general assembly.
• Documentation: All exceptions must be recorded in group meeting minutes and digitally tracked.

Note: Even when tenure is adjusted, the interest rate almost always remains fixed throughout the cycle.

Outstanding Loans After Cycle End

Scenario

At the end of a VSLA cycle, the group performs a share-out, where accumulated savings and interest are distributed among members based on their share contributions. However, if loans remain unpaid, the group must take action before finalizing the share-out to ensure financial integrity.

Common Resolutions for Unpaid Loans

Deduct from Defaulter’s Share-Out

If the borrower has sufficient share contributions, the outstanding loan amount (including interest and fines) is deducted directly from their share-out balance.

Example:

• A member is entitled to GHS 300 in share-out.
• Outstanding loan + interest = GHS 120.
• The member receives GHS 180 (after deduction).

This is the most common approach and ensures minimal financial loss to the group.

Group Absorbs the Loss

If the borrower has no shares or the share balance is insufficient, and recovery is impossible:

• The group may write off the loan.
• The loss is absorbed by the entire group.
• The total share-out pool is reduced, lowering the returns for all members.

This is considered a last resort and may affect group morale and trust.

Loan Extension into the Next Cycle

If the group chooses to continue into a new savings cycle:

• The unpaid loan may be rolled over into the new cycle.

The borrower is required to:

• Remain an active member.
• Sign a loan continuation agreement.
• Repay the balance through future contributions or deductions from the next share-out.

This option preserves group harmony and may be suitable for borrowers facing genuine hardship.

Why Share-Out Finalization Should Be Blocked with Unpaid Loans

Preventing the final share-out until all loans are resolved ensures:

• Fairness: No member gains or loses unfairly.
• Transparency: Loan recovery methods are visible and traceable.
• Accountability: Reduces the risk of mismanagement or misappropriation.
• Financial Accuracy: Ensures end-of-cycle reports are correct.

Loan Performance and Credit Scoring

In Velociti, VSLA loan history feeds into a credit scoring engine:

Positive indicators:

• Timely repayment
• Consistent borrowing and repayment history

Negative indicators:

• Missed repayments
• Borrowing above savings limit

These scores help assess a member’s financial behavior and potential for larger external financing.