Village savings and loan schemes help the poor save in remote communities like this one in Malawi. Photo: Erik Mandell for MercyCorps

The world's poorest have long struggled to borrow. Now, an alternative microfinance model is also making it easier for poor people to save.

Microfinance institutions have provided lending services to millions of the world’s poor people for several decades. But loans must be paid back, and even traditional microlenders are hesitant to lend money to the poorest of the poor—including those living in some of the most remote and unpopulated communities. That’s where the model of village savings and loans associations (VSLAs) comes in, according to a recent Economist article.

The idea is simple: savings, rather than just borrowed money, is key to helping poor people become more stable and less vulnerable. Differing from the better-known Grameen Bank model of microfinance, which provides individual or group loans and operates on credit, a village savings and loan scheme allows a group of community members to pool their savings, lend within the group, and save the interest earned from the loans to disperse to members individually or use for community projects.

This model enables both borrowing capabilities and longer-term savings accumulation for both the group and its members.

CARE International, a humanitarian aid organization focused on fighting poverty, engineered the VSLA model in Niger in 1991. Today, CARE oversees village savings and loan associations in Ghana, Malawi and Uganda. Numerous other non-governmental organizations have promoted village savings groups that serve more than 4.6 million members in 54 countries.

While nonprofits promote the model, the groups themselves are internally managed. Unlike solely credit-based models, group members do not owe repayment to an external bank, but rather to their own pool. Group constitutions are established by members, outlining rules, interest rates, and how savings and interest will be shared. Sometimes transactions, debts and credits are written in basic ledgers, but some groups with no literate members rely on memorization, familiar to those with a culture of oral history, according to Hugh Allen, founder of VSL Associates.

Amid criticism of the effectiveness of traditional microfinance models, as we reported a few months ago, VSLA schemes offer a different path to poverty alleviation.

And for some of the world’s poorest, savings—not a loan— is the golden ticket needed for a better life.

Erik Mandell is a graduate of Middlebury College in Vermont. He is currently pursuing a master's degree in public administration and global leadership at Portland State. Read his other contributions to Global Envision.