ANALYSIS: NCHIMUNYA MUVWENDE
IN A recent article in The Business Telegraph that had analysed performance of various investments for the year 2021, village banking was found to be the most lucrative asset in Zambia, surpassing even tradition risk-free assets. This reflects the level of uptake and acceptance of village banking services by most of the population given its simplicity, no collateral, and easy access to funds, even to people with no basic understanding of financial matters. Village banking has enabled business growth, idea actualisation and generally uplifted the lives of many participants of the village groups. However, the risks associated with the banking system have been on the rise. Stories of people running away with the money, high default rates and failure to recover invested funds have made headlines and hence the need to discuss how the banking system can be enhanced in order to mitigate the risks identified.
One of the major reasons why village banking has expanded rapidly as compared to traditional banking is that the biggest collateral needed is simply trust. Traditional banks may require physical collateral which is sold off in an event of default. But for village banking, which is mostly made up of people connected in some way, trusting that one will be able to pay back has been the major backing of sustaining the banking system. When coming up with a village bank, usually recommendation are made based on the trust and considered capability of individuals. Despite this, there are many instances where a person defaults and because no collateral was pledged, recovery almost becomes impossible. As a possible measure to mitigate this risk, groups should consider introducing a guarantour for each member. If someone recommends a person to join the group, they should partly bear the risk for a default. The guarantee system will help to critically scrutinise who joins a group, their capacity to pay back and also reduce the overall risk for the group in that the guarantor may forfeit part of their pay-out. The problem with trust is that it is based on emotions and connections and this may cause screening of friends and family not to be taken serious but if I know that I somehow bear the risk, I would be careful who I recommend. Remember that even if the group is made up of people you trust, village banking is just like any business and therefore trust alone is not enough but some safeguards should be put in place.
Individual risk assessment
Money growth in village banking works on the principal of lending money among group members and in most groups, it is mandatory that everyone should borrow a certain prescribed minimum. Differing criteria are used on how a person can borrow from the group. For some, it is a multiplier of the amount contributed and for others, it is the amount requested until all the money contributed is lent out. But one thing that village banks can learn from traditional banks is their ability to assess the risk of each potential borrower before lending the money. This is very important because the risk taken by one individual who might have borrowed so much can negatively affect the entire group. Because of differing earning, history of default and risky behaviours among members, it would be important to critically analyse each group member when deciding the maximum that can be given. In an event that a member wants to borrow way more money than provided, they should be able to pledge what can be sold off in an event that they default. Let the constitution of each group clearly define how money shall be recovered in an event that a group member fails to pay and also ensure that each member understands the constitution. If not careful, a member may borrow to gamble the money, lose it all and fail to pay back with no recovery mechanism put in place.
Learning best practices
Informal banking systems in Zambia have evolved over the recent past. This started with the illegal pyramid schemes that duped a number of people, then the emergence of the non-interest generating chilimba and finally the prototype of traditional banks in the name of village banking. The rules that have been guiding different village groups are not uniform and because of this, the rules have determined either the success or failure of these groups. This now calls for researchers, scholars and authors to write on the rules and regulations that have facilitated the growth of village banking, the risks and mitigation measures and basically how this banking system can be well integrated with formal systems to safeguard the money for the depositors. This will provide insights for both formal and informal banking systems which will then benefit the nation as a whole. Traditional banks have lessons that can be learnt from village banking on how to engage the low income people or the financially illiterate and when faced with more competition, they may reconsider the interest rates that are currently too high as compared to the region and the result will increase access to finance for many, thereby facilitating increased economic activities. Zambia has indeed become a trendsetter on how to advance banking to even those people that have for so long been overlooked and neglected by formal banking systems and the model that can be replicated around the world as it has benefited many people. It is therefore wise that the shortcomings are dealt with and the banking model is enhanced as the country advances financial inclusion and addresses the challenges of poor access to finance that has inhibited economic activities. The author is an economist.