villagefinance

A cluster of VSLAs in rural Rwanda. Clustering expands the market for governance, and enhances opportunities to ‘rewire’ networks.

The heart of VSLA is ‘time-limitation.’ The time-limitation feature is typically understood as an ‘action audit’ – a way for members to manage risk by giving them an opportunity to say “show me my money.”

A recent study of human cooperation[1] gives us a fresh look at time-limitation. There have been many doubts raised about cooperation: in particular due to the effect of so-called ‘free-riders,’ who exploit its benefits without contributing to its successes. However, the authors argue that cooperation is not destined to fail; this depends on how we manage it.

Of particular interest for VSLA practitioners is the insight that cooperation is enhanced when people ‘rewire’ their social networks – by dropping individuals who are not cooperating, and picking up new members who are. This not only creates more cooperative social networks, it creates strong incentives for free-riders to cooperate.

Time-limitation gives VLSA members an opportunity to ‘rewire’ their group networks at the end of each cycle. Do they want to keep their leaders, and all the same members? Should ‘defectors’ be dropped? NGOs often encourage VSLA members to view strong membership continuity across cycles as a positive indicator of social solidarity. Is this policy optimal? And once groups have loans from banks or MFIs, network rewiring across cycles may be further restricted.

If a group network calcifies, the incentive to ride free increases, reducing group stability.

Action audits and group rewiring – the informal sector can be highly innovative. When we tinker with it, let’s make sure we know why.