Archives for category: cooperatives

I’ve been asked about a zillion times what is the difference between savings and credit cooperatives (SACCOs), microfinance institutions (MFIs) and commercial banks. I’ve never had time to reply properly but now I came across this table from the World Council of Credit Unions (see below) that summarizes the differences in very simple terms. If there are other issues not included in the table (I’m sure there are tons), please write them down in the comment section.

Credit Unions

Commercial Banks

Other Microfinance Institutions (MFIs)

Structure

Not-for-profit, member-owned financial cooperatives funded largely by voluntary member deposits For-profit institutions owned by stockholders Institutions typically funded by external loans, grants and/or investors

Clientele

Members share a common bond, such as where they live, work or worship. Service to the poor is blended with service to a broader spectrum of the population, which allows credit unions to offer competitive rates and fees. Typically serve middle-to-high income clients. No restrictions on clientele. Target low-income members/clients, mostly women, who belong to the same community.

Governance

Credit union members elect a volunteer board of directors from their membership. Members each have one vote in board elections, regardless of their amount of savings or shares in the credit union. Stockholders vote for a paid board of directors who may not be from the community or use the bank’s services. Votes are weighted based on the amount of stock owned. Institutions are run by an appointed board of directors or salaried staff.

Earnings

Net income is applied to lower interest on loans, higher interest on savings or new product and service development. Stockholders receive a pro-rata share of profits. Net income builds reserves or is divided among investors.

Products & Services

Full range of financial services, primarily savings, credit, remittances and insurance. Full range of financial services, including investment opportunities. Focus on microcredit. Some MFIs offer savings products and remittance services.

Service Delivery

Main office, shared branching, ATMs, POS devices, PDAs, cell phones, Internet Main office, shared branching, ATMs, POS devices, PDAs, cell phones, Internet Regular visits to the community group
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After last week’s post on microfinance vs credit cooperatives we want to talk more about the “socio-financial landscape” in urban economies in Kenya. The fieldwork we are doing in Kariobangi is telling us some interesting stories.

First, we are realizing that the term “unbanked” depicts a completely wrong image of what’s happening in local economies: most entrepreneurs in Kariobangi, both informal and semi-formal, have one or more bank accounts. This might be the particular case of Kenya where the financial sector has deepened in the low-income population. Furthermore, banks must find their market segments in complex preexisting financial structures: in addition to bank accounts, entrepreneurs use a variety of other (mostly unconventional) financial instruments. In a certain way, the term “hyper-banked” seems more appropriate than “unbanked”.

So what are the “financial portfolios” of MSEs?

Starting from the informal side of the spectrum, the most common socio-financial instruments are the so-called ROSCAs (Rotating saving and credit associations) and ASCAs (Accumulating Savings and Credit Associations). ROSCAs are also known as “mery-go-round”: members of the groups meet regularly and contribute a certain amount. Then the entire “pot” (or lump-sum) of money collected goes to one member at each meeting on a rotating basis. ASCAs work on a similar way, but the money collected is given as a loan, not a lump-sum, to the members who apply for it, who have to pay it back to the group with interest over an agreed period. At the end of the year, all the money collected by the group plus interests on loans is divided among the group members.

Other common group types are the so-called saving clubs, where members simply keep their savings for future use; the investment clubs, where the money is used for investment in business, property or stock markets. Then there are the welfare associations, which operate as informal insurance companies. Moneys collected by groups are used only for emergencies, such as hospitalizations or funerals.

On the more formal side of the spectrum, there are the institutions that everybody knows: banks, microfinance institutions (MFIs) and credit cooperatives (SACCOs). We are noticing a growing hostility towards MFIs because of the high interest rates and the “harassment” of debtors when they are late with the repayments. Though, many businesses said that MFIs were very important for the growth of their business, but they can’t afford to borrow repeatedly over time. Some businesses also secured loans from banks such as Equity Bank and Co-operative Bank. Though, it is only a minority of businesses.