Community banking: shared interest

Summary

Community banking is a finance model that plays a crucial role in many countries on the African continent. These community-driven groups provide necessary financial support to communities without formal banking options. As a model, it aims to empower, but with trust as its cornerstone, it does not come without its challenges. With technology snapping at the heels of all industries, community banks need to embrace a digital future, and some companies, such as Kenya-based Kwara, are already beginning to do just that.   

Reading time

Six minutes

On the African continent, a microfinance model built on trust – where the community wins or loses together – is gaining in popularity as community banking goes digital

At a small cafe in a leafy suburb in Dar es Salaam, Tanzania’s financial capital, a table of 13 women rings with noise, laughter and chatter. Amid the chai, chapati and mandazi (a type of popular sweet fried bread) are spreadsheets and bank statements. Almost two years ago, these women came together to form a Vicoba (Village Community Bank), a popular microfinance model across sub-Saharan Africa whereby a savings group is owned and managed by its own members.

The women have gathered for their monthly meeting to discuss group finances.

Community wealth

Groups such as this take on different names across regions. In South Sudan, they are called ‘sanduks’; more commonly across Africa, they are referred to as VSLAs (Village Savings and Loan Associations). These are the small, informal groups, usually formed by people who know each other. But, there are also formal institutions for community banking known as SACCOs (Savings and Credit Cooperatives). While they function in a similar way, SACCOs can have thousands of members and are governed by a board of directors.

These community banking groups allow people to pool their monthly contributions into one pot, which could range anywhere from the equivalent of £5 to £500. These monthly payments – no matter how small they might be – allow people to save, and to access capital they might not otherwise receive.

Crucially, members can take out loans with favourable interest rates and deadlines, which are decided between themselves and as a collective. Typically, community banks set interest rates at 10% compared to 15–20% from traditional banks in some African countries. In many cases, a Vicoba can be a lifeline – particularly in African societies, where only 48% of the population has access to formal banking. “When you go to some villages in Tanzania, you might never even see an ATM. It means people are in a difficult position to access finance,” says Walter Nguma, an economist who is part of a consultancy firm in Tanzania. Such savings groups are essential to both rural and urban communities in Tanzania, a country where an estimated 14 million people live in poverty.

Vicoba initiatives are growing rapidly in popularity. The World Council of Credit Unions estimates that Kenya alone has almost 10 million credit union members. For many, being able to save regularly and access loans has enabled members to boost their businesses or cover basic expenses such as school fees, rent and health insurance.

Seeds for growth

Susanne Aroko, part of the 13-member Vicoba in Dar es Salaam, recently used the group to take out a loan to pay a family member’s school fees. She says being able to access emergency funds quickly has relieved her of financial stress. “Applying for a bank loan is a complicated process. I used to rely on my sister for money,” she says. “But now I can get emergency funds when I need it – and you get it immediately.” The Vicoba is also helping her savings to grow. “I thought of it as an opportunity for financial stability. It creates discipline, as you must contribute each month. From the interest paid on the loans we also benefit from the dividends at the end of the year.”

And the model goes beyond finance – it builds community. Mumu Bakari, a mother of three who lives in Kinondoni, a district in Dar es Salaam, says being part of a Vicoba has also provided her with moral support. She joined the group two years ago, along with 25 other members. “Mental health has been a big problem. But when we meet monthly, it’s a relief. We are mothers, we are wives, so we have similar experiences, and we support each other through that.”

Perhaps unsurprisingly, a unique bond is formed between members of community banks, who rely on each other to save, help each other through loans and build wealth together through dividends. By learning about each other’s financial goals, Bakari adds, they become involved in each other’s lives beyond money.

“There was a time when four of us in the Vicoba were pregnant at the same time, and everyone was taking care of us, and checking in to make sure we were OK,” she says. “Then, once the babies were born, we were sharing advice on vaccinations and breast pumps, so it’s been a really good thing.”

Trust issues

However such community banks are not without their challenges. Their greatest strength is also their greatest weakness – it is a model built on trust. Unlike traditional banks, community banks do not require any collateral to take a loan. If someone does not repay, there is little to hold them to account, putting every member’s money at risk.

This is particularly challenging when such groups are run manually. Members are required to do all of their group’s bookkeeping, keeping their records of monthly contributions and loan repayments. In some cases, they may even have to store currency themselves. But over the past few years, community banks have started to go

digital – with a plethora of fintechs and banks offering digital platforms designed specifically for this purpose.

_{^{Above top: Kwara Co-founders David Hwan and Cynthia Wandia.
Above: Wandia and Hwan with a client.}}

A digital future

The Covid-19 pandemic highlighted the need for community banks to go digital. Kwara, a Kenyan fintech company, is one such digital platform enabling this shift. Founder Cynthia Wandia was inspired to start the company by her grandmother, who worked as a small-scale coffee farmer in Kenya, and was widowed young and left with nine children to look after. Says Wandia, “it was only through a SACCO that she could take care of her family, maintain the farm and retire with dividends. I wanted to make it more effective through technology, and that is how we founded Kwara.”

The platform allows members digital access to financial services that previously would have required in-person interaction. Members are now able to view and download their financial statements, apply for instant loans, and make repayments through their phone or the web. They can also run a modern banking business, where they can register new members through a quick online process, manage their deposits and savings accurately, access credit decisioning, and be compliant with government regulations.

But the digital switch has also been difficult for some groups who were previously not reliant on technology. “Change management has been a challenge,” says Wandia. “All of a sudden everything is being given to a machine.”

Ruth Lawrence, a 32-year-old from Tanzania who has been part of several Vicobas, believes digital platforms have improved community banking. She is part of a 20-member Vicoba in Dar es Salaam. They use M-KOBA, a digital platform started by Tanzania Commercial Bank and M-Pesa, a mobile money service. “When we didn’t use a digital platform, we had a cash box and cash books,” she says. “The difference with using the platform is that transactions are seen by every member, we all see the loans taken out and the repayments made, so it makes everything more transparent and accountable.”

With deposits, transactions and loans all having the ability to be executed online, digital platforms also carry a risk of eliminating face-to-face interaction and regular communication – part of what makes such groups unique. But Aroko, Bakari and Lawrence all believe that the digital aspect will only enhance the bond between Vicoba members, as it helps such community banks to be run more efficiently.

“Without trust, it can be catastrophic. It happens. But when it works well, it creates relationships,” says Lawrence. Going forward, the challenge may be how community banks can continue to build those relationships while moving towards a digital future.

Priyanka Sippy is a multimedia journalist focusing on Africa. She has reported from Tanzania, Kenya and Ivory Coast for broadcasters and publications such as the BBC, Al Jazeera, TRT, New Internationalist and World Politics Review. Previously based in Dar es Salaam and Berlin, she currently reports for the BBC World Service in London. 

This article first appeared in RSA Journal Issue 4 2024.