Financial Services Associations: The Story so Far

The review reflects information available at an early stage in the development of the FSA model - the oldest FSAs have been in operation for only five years - and notes that the FSA model is characterised more by potential than proven achievements. FSAs have offered a restricted range of services yet they presently rely on members' capital as the principal source of funds, and lack the technical and organisational capacity to broaden the range of services offered.

It notes that FSAs:

• Offer increased access to financial services in relatively remote or small rural communities;
• Have the potential to operate sustainably in rural areas not covered by existing microfinance institutions (MFIs) and Cooperatives;
• Can achieve financial sustainability relatively rapidly, although important caveats remain concerning the need for a healthy loan portfolio.

Recommended strategies include:

• Improving the range and terms of financial services offered because of commercial and development considerations;
• Increasing the volume of transactions while maintaining efficient operations, could make FSAs more competitive by offering more favourable rates to savers and depositors while still ensuring investor returns;
• Extending access to banking services - through linkages with the banking sector.

However there have been limited successes demonstrated by:

• Usage rates of their services by members falling below initial expectations;
• Limitations stemming from population and economic activity levels of the rural centres may mean that individual FSAs may never grow substantially in scale;
• Scale-up in terms of numbers of FSAs may be more significant than scale-up in the size of individual FSAs;
• Usage rates of the services offered by FSAs are low, irrespective of the size of the FSAs;
• Many FSAs face significant problems with poor or distorted governance and poor portfolio quality.

The review concludes by making recommendations to donors emphasising that:

• Donor credit lines and grants for on-lending would be an inappropriate means of donors encouraging scale-up, as these would dilute community ownership and distort the strong incentive systems that underpin the model;
• Costs of necessary technical assistance and training for FSAs is also questionable from a cost-benefit perspective;
• they should concentrate on improving the FSA model, focusing particularly on the products and services offered, and the governance structures;
• They should strengthen the support units so that they can provide more effective technical assistance and training;
• Mechanisms should be developed to reduce the need for donor support to the support units over time, increase their sustainability, and reduce the level of donor subsidies needed for FSA start-up costs.