Village banks: a financial strategy for developing the South African poor households

Polly Mashigo,Humayun Kabir

doi:10.21511/bbs.11(2).2016.01

Abstract

Access to financial services is a vital component of poverty alleviation, community and individual development. The major constraint experienced by poor South African households is lack of financial support emanating from systemic weaknesses of the formal financial institutions which include lack of infrastructural facilities, high transaction costs and traditional collateral. The objective of this study is to propose a financial strategy that would improve access to financial services and develop the poor households in South Africa. The research is literature-based since it draws on a wide range of academic literature that documents village/community banks and financing the poor. International best practices which are equally important and crucial are used to identify financial inclusion strategy that alleviates the need for collateral and high transaction costs in financial transactions. The study reveals that village banks create access to basic financial services to the poor households on a sustainable basis through community/village mutual trust, relationships, accountability, perfect knowledge, customs and participation. Based on these findings, it is recommended that village banks be established and supported adequately and used as a financial inclusion strategy for developing the poor households in South Africa

Highlights

Village banks are formed for improving social inclusion and poverty alleviation
Even the Mzansi, a low-cost national savings account, which was introduced in 2004 to cater for 13.2 million South Africans who did not have bank accounts, was not a suitable vehicle for financial inclusion, since the account could not resolve the contradiction between affordability and access (Hawkins, 2004; Napier 2004; Mashigo, 2007)
The study poses the research question: what are the issues that hinder access to financial services by the poor households in South Africa? the study aims to propose a financial strategy of a financial institution that would provide low-cost credit, savings and insurance needs of the poor households which is crucial to their development, sustainning their livelihoods and improving their living standards, in general

Summary

Introduction

Village banks are formed for improving social inclusion and poverty alleviation. Village banking initiative greatly contributes towards reduction in poverty, it empowers poor women and encourages social and economic development in poor communities. The provision of these financial services by the formal financial institutions, both conventional banks and microlenders, is dominated and constrained by institutions’ systemic weaknesses, high transaction costs, the need for traditional collateral, as well as low returns and infrastructural limitation (Mashigo and Schoeman, 2011; Nigrini, 2001; Department of Agriculture, Forestry and Fisheries, 2009). The study aims to propose a financial strategy of a financial institution (i.e., village bank) that would provide low-cost credit, savings and insurance needs of the poor households which is crucial to their development, sustainning their livelihoods and improving their living standards, in general. This study will fill the gap in the relevant literature

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