Isal Impact Analysis

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Wesleyan University The Honors College

An Impact Study of the Village Savings and Loan

Association (VSLA) Program in Zanzibar, Tanzaniaby

Conner Brannen

Class of 2010

A thesis submitted to the

faculty of Wesleyan University

in partial fulfillment of the requirements for the

Degree of Bachelor of Arts

with Departmental Honors in Economics

Middletown, Connecticut April, 2010


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TABLE OF CONTENTS

Acknowledgements iv

Abstract v

Introduction 1

Chapter 1: Background to the Study 4

I. Context for the Study

i. Location and Physical Descriptionii. Historical Backgroundiii. Economic Background

a. Socioeconomic Statisticsb. The Education System

iv. Womens Status in the Economy and their Access to Credit

v. The Financial Sector

a. Formal Sectorb. Semi-Formal Sectorc. Informal Sector

II. The VSLA Program

i. CARE in Tanzaniaii. The VSLA Methodologyiii. Apex Organizations and the Sustainability of the VSLAs

Chapter 2: Literature Review 31

I. Impact of Microfinancei. Financial Assets

ii. Povertyiii. Quality of Housing

iv. Educationv. Nutrition and Healthvi. Empowerment and Social Status of Women

II. MicrosavingIII. ROSCA/ASCA ParticipationIV. VSLA Performance

Chapter 3: Research Design, Methods, & Sample 45

I. Impact Assessment Methodologiesi. Selection Bias

ii. Examples in the LiteratureII. Study Design

i. Sampling Strategyii. The Individual Surveyiii. Focus Group Discussions

iv. Interviews with Key Informants

III. Quantitative Data Analysisi. Model Specification


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IV. Data Descriptioni. Basic Characteristics of Respondents

a. An Additional Test

ii. Socio-Economic Status of Respondentsa. Quality of Housing

b. Household Assets

c. Educationd. Nutrition

e. Healthf. Sources of Incomeg. Social Status

iii. VSLA Members Self-Reported Impactsa. Dynamics of VSLA Participation

b. Impacts of VSLA Participationiv. Impacts at the Individual Level

v. Impacts at the Community Level

Chapter 4: Empirical Results at the Household Level 102I. OLS Results

i. Sources of Incomeii. Household Assetsiii. Educationiv. Nutrition and Health

a. Meal Quantityb. Meal Qualityc. Health Expenditure

II. Probit Resultsi. Health

a. Use of Mosquito Netsii. Quality of Housing

a. Home Ownership

b. Housing Improvements

Conclusion 131

I. Lessons Learned

II. Areas for Future Research

III. Implications for the Sustainability of the VSL Modeli. Sustainability of JOCDO and the Apex Model in General

References 140

Appendix A: Literature Review Summary 145

Appendix B: Individual Questionnaire 148

Appendix C: Focus Group Discussion Format 159

Appendix D: Statistical Tables 160


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ACKNOWLEDGEMENTS

First and foremost, I would like to thank my thesis advisor Damien Sheehan-Connorfor his advice, support and patience throughout the entire processes. I am indebted toElias, whose brilliance and dedication inspired me and whose awful econometricsjokes made the many hours spent in the lab more bearable. I would like to thank thebeautiful ladies of 261 Pine, who listened to my concerns about my thesis for months.I especially would like to thank Emma for the camaraderie throughout the thesisprocess and Abby, who was always there whenever I needed a study break. I would

like to thank Lev for the work parties and the constant support. Last but certainly notleast; I would like to thank my family for their constant love and support. Dad Itruly could not have done this without your thoughtful guidance. Thank you for yourpatience and the countless hours spent proofreading.

I am very grateful to the staff at CARE International and the regional apexorganization who assisted with the field research in Tanzania. In particular, I wouldlike to thank George Mkoma, the director of the VSLA program for CARE Tanzania,as well as the village trainers, who carried out the individual surveys. Finally, mysincere gratitude goes to the members of the VSLA program who participated in thesurvey and the focus group discussions, without whom this assessment would not

have been possible.


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ABSTRACT

In 1991, CARE International, a leading humanitarian organization, launched a uniquesavings-based microfinance program called a Village Savings and Loan Association(VSLA). Today, the model is being replicated across sub-Saharan Africa. Althoughprevious studies have shown substantial benefits from participating in the VSLAprogram, these studies likely suffer from selection bias and other methodologicalweaknesses. This study attempts to improve upon the existing work by examining theimpact of one of the first VSLA programs, located in Zanzibar, Tanzania, using both

quantitative data from individual surveys, and qualitative data from focus groupdiscussions and key interviews. In order to control for selection bias, this studyutilizes a control group of new VSLA members who are still in the initial trainingphase, and also statistically controls for differences in demographic characteristicsincluding age, gender, religion, marital status and education, which may affectprogram impact. The results suggest that participation in the program has an overallpositive impact on various indicators of household and individual welfare, includingasset expenditure levels, the development of income-generating activities (IGAs),education expenses, access to health services, nutritional levels and quality ofhousing. Such positive results are particularly encouraging given the long-termsustainability of the VSLA model - the program does not rely on outside donor

funding and does not require continued support from the founding organization.Overall, these results suggest that the VSLA model is both successful and sustainable.Furthermore, it may offer potential teaching benefits for other microfinance programsin developing countries.


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INTRODUCTION

Over the past twenty years, microfinance has become one of the hottest topics

in development economics. In 2007, more than 100 million of the worlds poorest

families received a microloan (Daley-Harris 2009, 1). Microfinance encompasses the

provision of financial services, including loans, savings and insurance, to low-income

clients who generally lack access to more formal banking services. The promise of

microfinance lies in its ability to empower people to work their own way out of the

poverty trap, while avoiding dependency and the hand out shame of conditional aid.

As the number of microfinance institutions has increased across the globe, so has an

interest in understanding the nature of the clients and how they are impacted by

program participation. Although impact studies face a variety of methodological

limitations, numerous studies have found substantial positive impacts of participation

in microfinance programs, specifically in the areas of eradicating poverty, promoting

childrens education, improving health outcomes for women and children, and

empowering women.

I. Objective of the Study

Although traditionally the provision of microloans has been the dominant

feature of most microfinance programs, recently there has been an increasing

appreciation of the importance of savings mechanisms. In 2001, CARE International


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implemented a unique savings-based microfinance program called a Village Savings

and Loan Association (VSLA) in Zanzibar, Tanzania. In 2006, Decentralized

Financial Services (DFS), a consulting group based in Kenya, carried out an impact

study of the program to examine its long-term sustainability and its impact on its

members (Anyango et al. 2006). Although their results are encouraging, the study

suffers from several methodological weaknesses. Today, as the VSLA methodology

is being replicated across not only Tanzania, but across all of Sub-Saharan Africa, it

is of utmost importance to return to one of the original projects to analyze once again

its impact and long-term sustainability, so that its operations may be better

understood, improved upon and adjusted where needed. The purpose of this study is

to expand and improve upon the study conducted in 2006 and to re-examine the

impact of CARE Internationals VSLA program in Zanzibar. The results are intended

to assist CARE and other affiliated organizations to better understand the dynamics

and impact of VSLA participation so that the program might better serve its members.

II. Framework and Hypotheses

The study is comprised of an individual questionnaire administered to 170

households, including those of current members, previous members and incipient

VSLA members (who serve as a control group in order to isolate and assess the

impact of the VSLAs). The survey data is complemented by three focus group

discussions as well as several interviews with key informants within CARE and its

affiliated organizations. Finally, a thorough understanding of both the economic and


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social setting in which the program operates, as well as of the institution itself,

facilitates interpretation of the data from the survey and focus group discussions.

The hypotheses tested are that participation in the VSLA program would

result in (1) improvements in the economic and social welfare of the household; (2)

growth and/or diversification in income-generating activities (IGAs); and (3)

increased empowerment (social, as well as economic) for members. Under each of

these broader hypotheses, a number of specific hypotheses are developed and

explored in greater detail throughout the report.

III. Organization of the Report

The next chapter provides background information for the study. After

presenting a general profile of Tanzania, it highlights the historical, economic and

social context of the study. It then describes CAREs role in Tanzania and the VSLA

methodology. Chapter 2 investigates the findings in the literature, in order to facilitate

comparisons with the results of this study. Chapter 3 explains the survey

methodology and the sample of respondents, and presents the initial comparisons

between the statistical means of the data. Chapter 4 presents the results of the

quantitative data analysis. The final chapter reviews the findings and addresses their

significance and implications. Appendix A summarizes the impact studies referenced

in the report. Appendix B presents the format used for the individual questionnaire

while Appendix C presents that used for the focus group discussions. The data tables

referenced in the text are presented in Appendix D.


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CHAPTER 1BACKGROUND TO THE STUDY

I. Context of the Study

i. Location and Physical Description

The United Republic of Tanzania lies on the East African coast between

Kenya and Uganda to the north, Rwanda, Burundi and the Democratic Republic of

the Congo to the west, and Malawi and Mozambique to the south. It covers an area of

approximately 364,929 square miles (945,166 km2), which is about 1.5 times the size

of Texas. About 25 miles off the coast of Tanzania sits the semi-autonomous islands

of Zanzibar. Zanzibar is comprised of several islets and two larger islands: Unguja

(the main island, generally referred to as Zanzibar Island), and Pemba. Zanzibar

Island is about 53 miles (85km) long and between 12 and 19 miles (20-30km) wide;

Pemba is about 47 miles (75km) long and between 9 and 12 miles (15-20km) wide.

The largest settlement is Zanzibar Town, or Stone Town, on the west coast of

Zanzibar Island. Both of the larger islands are fairly flat and have a tropical climate.

Temperatures generally fall around 90F most days with extremely high levels of

humidity. Tanzania is too near to the Equator to experience any sort of dramatic

contrast between summer and winter. However, the months between October and

April are marginally hotter than those between May and September, with January


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being the hottest month of the year. The rainy season is generally split into the short

rains, or mvuli, in November and December, and the long rains, or masika, from late

February to early May (Tanzania National Website).

With a population of approximately 40.4 million in 2007, Tanzania is the

second most populous country in East Africa, after Ethiopia. The total population of

Zanzibar Island is about 620,957 and Pemba is about 360,797. The majority of the

Zanzibari population (97 percent) practices Islam, owing to the centuries-long

colonization as an Omani sultanate; the remaining population is a mix of Hindus and

Christians (World Bank 2009, 1). Kiswahili and English are Tanzanias two official

languages, but Arabic is also commonly spoken in Zanzibar (Tanzania National

Website).

ii. Historical Background

Zanzibar was formerly an Omani colony with a strict racial hierarchy in which

Arabs dominated the black majority. In the late 19thand early 20thcenturies, the

power of the Omani sultans waned and they became simply puppet rulers under the

British Empire. In the early 1960s, as the nationalist tide swept across the colonies,

the British began to withdraw and on December 10th, 1963, Zanzibar became an

independent nation. A month later, the bloody Zanzibar Revolution, supported by the

black majority, overturned the largely Arab government, banished the sultan and his

family and brought the majority Afro-Shirazi Party (ASP) to power. On April 12 th,

1964, the socialist-oriented president, Sheikh Abeid Amani Karume, signed a

declaration of union with Tanganyika, thus forming the United Republic of Tanzania

(Tanzania National Website).


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In 1967, just three years after unification, with the adoption of the Arusha

Declaration, the newly-created Tanzanian government launched the Ujamaa village

development scheme across all of Tanzania, including Zanzibar. Ujamaa was

intended to rally the citizenry around the banner of socialism and to increase

productivity through the creation of communal villages. Within just seven years,

more than 9 million people (60 percent of the population) had been resettled into

6,000 villages (Ingle 1972). Rather than increasing production and generating

development as expected, these policies left the rural population worse off than

before. State marketing boards were created to act as the middleman between the

producers and consumers. However, these marketing boards simply facilitated the

overtaxation of the rural agricultural sector. Government taxed the agricultural sector

heavily through both direct taxation (usually by turning the internal terms of trade

against agriculture through such interventions as artificially low consumer prices for

food and high input prices) and indirect taxation (mainly through the impact of an

overvalued exchange rate on agricultural tradeables). The surplus generated from the

overtaxation of the rural population was not subsequently reinvested in rural

infrastructure or services, but rather in gaudy and unnecessary development projects,

primarily in urban areas, such as monuments or ill-planned industrialization projects

(Lubawa 1985).

In Zanzibar, clove production particularly suffered under the socialist policies

of Ujamaa. In the early 1970s, Zanzibar was the worlds leading producer of cloves.

However, under Ujamaa, in a process similar to that occurring throughout Tanzania,

the large farms were split up into fewer units and it became illegal to sell cloves to


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any buyer other than the government. As a result, farmers received a price lower than

the world market value, which caused systematic underinvestment (Lubawa 1985).

Few new trees were planted and the current trees are now coming to the end of their

productive lives. Consequently, clove production in Tanzania has never returned to its

pre-Ujamaa glory. Today, Zanzibar ranks a distant third in the world market, with

Indonesia supplying 75 percent of the world's cloves compared to Zanzibar's 7

percent (Country Report2008).

The failure of Ujamaa goes beyond state marketing boards and diminished

incentives in agriculture. From the very beginning, the project was plagued with poor

planning and ill-suited strategies. Administrators designated a large proportion of

funding to modern technologies, which were ill-suited to the environment as well as

the subsistence-style farming. Despite the burden of such inappropriate technologies

and the artificially low prices, most farmers had few alternatives. Private

entrepreneurship was discouraged and for those who did hold strong entrepreneurial

ambitions, access to the necessary credit was severely limited, even non-existent. The

government prohibited the formation of private initiatives, such as Non-

Governmental Organizations (NGOs) and credit cooperatives, and all commercial

banks were nationalized and thus responded solely to the needs of the state rather than

the poor entrepreneur (Mutesasira 1992, 2). Therefore, though most remained

employed in agriculture, they chose to decrease production in response to the

detrimental policies of Ujamaa.

In the late 1970s, as overall agricultural output began to decline and hunger

intensified across the country, the Ujamaa program began to unravel. It subsequently


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fell apart completely when an economic crisis struck the country in the beginning of

the 1980s. Real per capita income growth dropped from 1.9 percent between 1970-76

to negative 1.0 percent between 1980-85. Meanwhile, inflation rose unabated, spiking

to 44 percent by 1984, while internal and international deficits continued to rise. The

situation was further exacerbated by the 1978 war with Ugandas Idi Amin and a

large drought in the 1980s (Muganda 2004, 1).

In 1986, the magnitude and intensity of the economic crisis led the Tanzanian

government to adopt the IMF-directed Economic Recovery Program (ERP), which

included economic stabilization and structural adjustment measures (Muganda 2004,

1). As government jobs and overall spending were cut, unemployment increased

significantly. More and more people were forced into self-employment and informal

business activities. However, lack of access to credit made success in the informal

sector difficult to achieve, particularly in rural areas where the majority of the

population lived. The privatization of the National Microfinance Bank (NMB) and

Cooperative Rural Development Bank (CRDB), which was part of the IMFs

structural adjustment measures, resulted in the closure of seventy-eight branches

throughout the country, further restricting credit accessibility for the increasing

proportion of the rural population involved in the informal sector (Ssendi and

Anderson 2009, 5). Although the late 1980s also saw a shift in financial policy, with

an increasing number of private and NGO-institutions and cooperatives participating

in microcredit schemes, access to credit continues to be severely limited to this day.

As of 2007, just 10 percent of the population had access to formal financial services,

up from 6.4 percent in 2001 (World Bank 2009, x).


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iii. Economic Background

Tanzanias economy was slow to recover from the legacy of Ujamaa. Real

GDP growth was stagnant throughout the 1990s. However, it picked up in the second

half of the decade, averaging 4.2 percent between 1996 and 2000. Since 2000, growth

has continued to rise, despite several years of drought, reaching 7.0 percent in 2007,

making Tanzania one of the fastest growing non-oil economies in Sub-Saharan Africa

(World Bank 2009). The small economy of Zanzibar, however, has been much more

erratic, with wide swings in GDP growth rate from year to year. Although real GDP

growth averaged 7 percent between 1996 and 2000, it peaked at 16.1 percent in 1996,

but was only 1.6 percent in 1998. In 2001 and 2003, growth rebounded, with rates

around 9 percent. However, the rate slowed again in 2005 to 5.6 percent (Country

Report 2008).

Due to rapid population expansion, growth in the national GDP per capita has

not kept pace with real GDP growth. Nonetheless, there has still been substantial

improvement. In 2002, GDP per capita (measured at purchasing power parity (PPP)

in current U.S. dollars) was $594; by 2008, it had increased to $1,243 (World Bank

2009). However, this is still low compared to Tanzanias neighbors for example, in

2008, Uganda had a GDP per capita of $1,512, Kenya had a GDP per capita of

$1,455, and South Africa had a GDP per capita of $12,574 (Human Development

Report 2009).

The Tanzanian economy is still heavily dependent on agriculture, which in

2007 accounted for just over a quarter of GDP and employed approximately 80

percent of the labor force, mostly in subsistence farming and smallholder cash-


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cropping. Tanzania is also endowed with substantial mineral and natural resources,

such as gold, diamonds, and several other precious and semiprecious stones,

including tanzanite, a blue-purple stone unique to the country. In 2006, Tanzania

accounted for almost 2 percent of world gold production. Tanzania, which is home to

many well-known natural wonders, including Mount Kilimanjaro, Africas highest

peak; Lake Victoria, Africas largest lake; and the plains of the Serengeti, has also

benefited from significant increases in tourism growing form 7.5 percent of GDP in

1995 to 16 percent in 2004 (World Bank 2009).

The breakdown of the economy of Zanzibar is very similar to that of Tanzania

overall, with agriculture accounting for approximately a quarter of the economy. The

Zanzibari economy, however, is very vulnerable to fluctuations in agricultural

production, especially in clove production, which still accounts for just under 25

percent of Zanzibars agricultural production. Food production accounts for 60

percent of all cultivated land, with the main subsistence crops being millet, maize,

sweet potatoes, bananas, cassava, peas, rice, groundnuts (peanuts) and sorghum

(World Bank 2009). Zanzibar also has an extensive local fishing industry, and the

government is hoping to develop a modern fishing fleet. Finally, tourism is becoming

an increasingly important aspect of the economy, as Zanzibar is becoming a

progressively more popular destination in Europe and East Asia, in particular

(Tanzania National Website).

Recently, Zanzibars economic growth has been restricted because of frequent

power outages. At the time of this study, Zanzibar was currently in the middle of a

two-month long power outage. The islands were entirely dependent on alternative


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methods of electricity generation, primarily diesel generators. Zanzibar suffered a

similar power outage during May and June 2008. Such power outages threaten to

shock the island's fragile economy, which is heavily dependent on foreign tourism.

However, rural areas are considerably less affected, as few households have access to

electricity anyway.

a. Socioeconomic StatisticsZanzibars growth, like the growth of Tanzania overall, is also constrained by

the extremely high population growth rate. Tanzania is one of only 35 countries in

world where the total fertility rate is still higher than five children per woman.

Fertility has not declined in the past 10 years, and the UN is predicting that the

population will reach 67 million by 2050 (Ellis et al. 2007, 33). Such rapid population

growth has far-reaching implications for human capital development, employment

creation, and the environment, as well as for public services and resource

mobilization. Because of the high population growth rate, Tanzania has a larger

proportion of its population in the younger age groups than in the older age groups.

With only about half of the population in the economically productive range (15-64),

a substantial burden is placed on that age group to support older and younger

household members (NBS 2005).

The high population growth rate also puts immense pressure on the education

and healthcare sectors. As a result, the country still lags behind other developing

countries in the region in terms of demographic and socioeconomic statistics. As

measured by international poverty standards, Tanzania has the highest rate of extreme

poverty in the world, with 88.5 percent of the population subsisting on less than $1.25


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per day and 96.6 percent on less than $2 per day (World Bank 2009, ix). Tanzania is

ranked 151stout of 177 countries assessed in the United Nations Development

Program (UNDP) 2009 Human Development Index (HDI), which is based on a

number of factors, including life expectancy and adult literacy. Its position has not

improved substantially in recent years as Tanzania ranked 151stout of 173 countries

in 2002. For the sake of comparison, war-torn Sudan is currently tied with Tanzania

in the HDI rankings (World Development Report 2009).

While the overall health status of Tanzanians remains poor, major health

indicators are generally better than the Sub-Saharan African average, although they

are worse than the low-income-country average. In 2007, life expectancy at birth was

a meager 52 years, compared with 51 years for Sub-Saharan African countries on

average, and 58 for low-income countries on average. In the U.S., life expectancy is

approximately 78 years. Tanzania has made little improvement in maternal mortality

with a significantly higher-than-average rate of maternal mortality among Sub-

Saharan African countries. Tanzanian mothers die at a rate of 950 per 100,000 live

births, compared to the Sub-Saharan average of 900 and the low-income countries

average of 780. However, substantial improvements have been made in infant and

child mortality rates. In 2007, the infant mortality rate was 74 per 1,000 live births,

compared to 94 for Sub-Saharan Africa and 85 for low-income countries. The under-

five mortality rate for Tanzania was 118 per 1,000, compared to 157 for Sub-Saharan

African countries, on average, and 135 for low-income countries (World

Development Report 2009). Nevertheless, the vast majority of child deaths are still

the result of preventable illnesses, including malaria, pneumonia, diarrhea,


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malnutrition, HIV/AIDS, and complications from low birth weights. Malnutrition also

remains a significant problem - almost four out of every ten children under the age of

five are chronically undernourished and too short for their age (stunted) and about

one out of every five children weighs too little, given his or her height. A significant

percentage of all Tanzanians (44 percent) are energy deficient and unable to

simultaneously sustain their body and carry out even light physical activity (World

Bank 2009, 8). This has detrimental implications for the growth prospects of the

country.

b.

The Education System

The Tanzanian population is also poorly educated in 2007 only 69.4 percent

were literate (World Development Report 2009). However, Tanzania has made

remarkable progress in increasing primary school enrollment in the past several years,

from 59 percent in 2001 to more than 84 percent in 2007 (NBS 2005). The structure

of the formal education system comprises seven years of primary education, four

years of ordinary level secondary school, two years of advanced level secondary

school, and up to three or more years of tertiary education. Students must past a

national standardized exam to advance to the next stage of their education. In 2008,

49.41 percent of the 999,070 students who sat for the National Standard 7 exam, at

the end of primary school, received passing marks. Ninety percent of these students

were subsequently selected to join public secondary schools in 2009 (Tanzania

National Website).

In 2002, the federal government eliminated tuition for public primary school.

However, families still have to pay for uniforms, school supplies and testing fees.


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Secondary schools are not tuition free, but they are subsidized by the government,

allowing tuition to remain around Tsh20,000 (US$18) per year (World Bank 2009).

Additionally, the attendant fees for secondary school are often greater than those for

primary school, which when combined with the cost of tuition, prohibits many

families from sending their children to secondary school.

Swahili is the language of instruction in public primary schools. However, by

law, all secondary and tertiary education is taught in English. This policy has caused

some controversy. While some argue that English is necessary to prepare students to

compete in the global economy, others argue that forcing students to learn in English

distracts them from concentrating on the subject matter and often causes talented

students to be left behind. Students often reach tertiary school without having attained

proficiency in English, which has a detrimental effect on their higher education.

Although substantial improvement has been made in primary school

enrollment, secondary enrollment, at only 25 percent, remains low and there is a

substantial gap across income levels. The 2005 Demographic and Health Survey

(DHS) showed only 2 percent of the poorest 40 percent of students advance to

secondary school after taking a selective exam (NBS 2005). Gross tertiary enrollment

in Tanzania is also among the lowest in Africa, at 1.5 percent in 2007, compared with

3.5 percent in Uganda, 2.8 percent in Kenya and 5.1 percent for Sub-Saharan Africa,

on average (World Bank 2009, 6).

Furthermore, there is a large gap in educational attainment between males and

females in Tanzania. The median number of years of school for Tanzanian males is

3.2, which is 33 percent more than the median number of years of schooling for


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females, 2.4. This disparity is even greater between urban and rural residents. The

median number of years of schooling is 6.1 among both urban males and females,

compared with just 2.5 and 1.5 years of schooling for rural males and females,

respectively (NBS 2005). Obviously, these numbers will need to improve if the

Tanzanian economy is going to continue to grow.

iv. Womens Status in the Economy and their Access to Credit

Although women are responsible for much of the countrys economic activity,

especially in agriculture and informal business, economic opportunities are often

markedly different for men and women in Tanzania. Creating opportunities for

women can help to not only empower women, but also to unlock the full economic

potential of their country.

Women constitute 50.6 percent of the employed labor force in Tanzania. Their

overall labor force participation rate (including the informal sector) is 80.7 percent,

which is slightly higher than that of men at 79.6 percent (Blackden and Rwebangira

2004, 7). Despite womens high economic participation rate, men account for 71

percent of workers in formal sector employment and are more likely to be in paid jobs

than women (Ellis et al. 2007, 4). This may be due to traditional cultural explanations

on differing roles for men and women, or to womens lower educational attainment.

Even for the women who do have paid jobs, in most paid labor occupations, men

have substantially higher earnings compared with women. For example, in

manufacturing, the mean monthly income paid to women is Tsh42,413 (US$38),

which is approximately 30 percent lower than the average income earned by men

(NBS 2002).


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Because of such inequities in formal employment, women often rely on

microenterprises as a means of income generation. The International Labor

Organization (ILO) estimates that the number of women entrepreneurs in Tanzania

ranges from 730,000 to 1.2 million (ILO 2003). The majority of these

microenterprises operate in the informal sector because of the difficulties of starting a

business in Tanzania. In fact, 98 percent of all businesses in the country operate

extralegally because of the obstructive regulatory and administrative obstacles to

registering, incorporating and conducting business activities (Ellis et al. 2007, 41).

Given that women have many more competing demands on their time than men,

because of domestic responsibilities, the bureaucratic hurdles of entering into

business is likely to have a disproportionately negative impact on them. Therefore,

the vast majority of women micro-entrepreneurs operate within the informal sector.

Because women tend to be less educated and because they are also subject to

cultural and religious perspectives on the kinds of jobs acceptable for females, they

tend to engage in more traditional activities, such as street vending or charcoal

production, which have a much lower profit margin. Women are often unable to

break out of the confines of these low-margin activities because they generally lack

access to formal sources of credit.

Womens access to formal sources of credit is restricted because they often

lack collateral, the primary source of which is land. Women are estimated to own

about 19 percent of registered land, and their plots are less than half the size of those

of their male counterparts (Ellis et al. 2007, 50). Although the law guarantees

womens right to property ownership, customary law often overrides statutory law,


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leaving the majority of women without the required assets to provide collateral for

loans. This is particularly the case in relation to inheritance and in circumstances of

the death of or divorce from a spouse.

In the case of death, it is not uncommon for the husbands relatives to take the

family property, including land, homes, livestock, furniture and household items, and

leave the widow and her children without any support. The widow can choose to be

inherited as a wife by one of the relatives of her deceased husband, to go back to her

people or to live with her children. Although efforts to reform the customary law of

inheritance have been underway since 1983, the government is reluctant to force

through reforms on laws and practices that have their roots in such strongly held

traditional, cultural and religious values (Ellis et al. 2007, 52)

Divorce is similarly devastating for most womens economic circumstances.

The Marriage Act of 1971, which in theory supersedes customary and Islamic laws,

gives women the right to retain and control their own property whether they acquired

it before or during their marriage. If property is acquired during the marriage in the

name of either the husband or the wife, that property belongs to that person to the

exclusion of the other spouse. However, given the strong cultural inhibition against

women holding property in their own name or even jointly with the husband,

properties are customarily registered in the name of the husband. When granting a

separation or a divorce, the court is required to take into account the extent of the

contributions made by each party towards the acquisition of the major assets,

including property, but this approach tends to undervalue domestic services

performed by a wife. It can be very difficult to prove her contribution to the


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household. Moreover, the court is required to take into account the customs of the

community to which the parties belong (Ellis et al. 2007, 54). Again, like in the case

of death of a spouse, customary law often leaves women without access to land and

thus without collateral for formal credit.

Because of these additional constraints facing women and because of the

overall importance of women in the Tanzanian economy, many microfinance

institutions have made a concerted effort to include women. Furthermore, in studies

from a variety of developing countries, loans have been shown to have a greater

effect on the household and the community, as a whole, when the borrower is a

woman (Pitt and Khandker 1998, 2003; Khandker 2005; Strauss and Beegle 1996;

Hoddinott and Haddad 1994).

v. The Financial Sector

a.Formal Sector

It is helpful to divide Tanzanias financial sector into three general categories:

formal, semi-formal and informal. The formal financial sector is comprised of

licensed commercial, regional and rural banks, which fall under the supervisory and

regulatory jurisdiction of the Bank of Tanzania. These institutions tend to be

concentrated in urban areas, especially after the financial sector restructuring in the

late 1980s. They are also primarily designed for use by the wealthier segment of

society. The poor and women, in particular, rarely rely on the formal financial sector

for a myriad of reasons, including high account opening balances, high minimum

balances, unrealistic limits on withdrawals, complicated procedures that are


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incomprehensible for the illiterate population, inaccessibility and high transaction

costs (Mutesasira 1999, 15).

b. Semi-Formal Sector

The semi-formal financial sector includes both Savings and Credit

Cooperative Organizations (SACCOs) and NGO-based microfinance institutions

(MFIs). A SACCO is a semi-formal savings device, in which members contribute a

weekly savings share to a central fund. Eventually, the fund may be used to grant

short-term loans to members, at a chosen interest rate. Although there is a similar

mechanism within the informal sector, SACCOs fall into the semi-formal sector as

they must be legally registered with the government. While this allows for greater

scale of operations, it also involves greater transaction costs. Formal registration

requires a higher level of bookkeeping skills, which makes SACCOs less user-

friendly for the poor, who are often illiterate. Furthermore, unlike their informal

counterpart, SACCOs are not self-sustaining as they generally rely on external capital

injections from donors, rather than the savings deposits of other members (Johnson et

al. 2005).

There are over 20 NGO-MFIs in Tanzania (Mutesasira 1999, 13). These

organizations are operated by a paid professional staff and can provide more

sophisticated financial services compared to SACCOs. They are also considered to be

a lower risk alternative for the borrower, especially if the MFI is large and well-

established. NGO-MFIs operate on a much larger scale, typically serving thousands

of clients. However, because of certain government regulations, including a

requirement of owning a business to access loan services, many poor people are


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unable to access the services of NGO-MFIs (Mutesasira 1999). These organizations

are also limited in the breadth of services they provide. They are not allowed, by law,

to accept savings deposits except those used as collateral, which denies the poor the

opportunity to save (Gallardo et al. 2005). Because they are more heavily regulated

and employ a professional staff, NGO-MFIs also involve high transaction costs. As a

result, in order to function on a sustainable basis, they tend to concentrate in more

urban or suburban areas, thereby limiting their rural outreach.

c. Informal SectorThe informal sector is by far the largest and most important in Tanzania. Out

of Tanzanias approximately 1.8 million enterprises, only 0.4 percent obtains their

credit from formal sources and less than 0.3 percent from semi-formal sources

(Mutesasira 1999, 5). The informal sector has emerged to satisfy the financial needs

of the majority of the population, who are left behind by the formal and semi-formal

sectors.

There are a variety of mechanisms for accumulating capital available in the

informal sector. Saving at home is arguably the most prevalent savings mechanism in

Tanzania but is rarely successful as a long-term strategy because savings are

susceptible to outside demand from ones family and neighbors. This mechanism

involves no entry barriers but high risk. Reciprocal lending among friends and

relatives is another prevalent mechanism but is on the decline because of the

increasing dishonesty and lack of trust among many people (Kashuliza et al. 1998).

This method also presents barriers because one needs to know and trust the

counterparty in order to have access to financial exchange. However, risks involved


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are relatively low since people tend to lend only to those they know. Moneylenders

provide another alternative. They generally demand relatively high interest rates but

transaction costs are low and disbursement is normally quick. Moneylenders tend to

operate in highly localized markets and have close relationships with their debtors,

which allows for flexible lending arrangements. However, there is a general feeling

among potential borrowers that moneylenders behavior is exploitative and that they

should be avoided. Furthermore, there is a general understanding that moneylenders

will not lend to the poorer members of the community (Buckley 1997).

Within the informal sector there are two more formal alternatives: Rotating

Savings and Credit Associations (ROSCAs) and Accumulating Savings and Credit

Associations (ASCAs). ROSCAs, which are called upatuin Tanzania, are the

simplest form of financial intermediation. In a ROSCA, a small group of people,

generally between 15 and 30, form a group and contribute an agreed amount at

regular meetings. The entire fund is then distributed to each member on a rotating

basis, until everyone in the group has received a loan. The system involves a high

degree of flexibility, with the participants determining the size of the group, the

amount to be saved, the frequency of contributions, and how the funds can be used

(Johnson et al. 2005). Although ROSCAs may provide a variety of social benefits and

impose savings discipline, they do not accrue interest and therefore may be relatively

ineffective for productive investment.

An ASCA is essentially an unregistered and informal version of a SACCO.

They are very similar to ROSCAs but, like a SACCO, involve a central fund into

which the weekly contributions are deposited. Instead of the fund being automatically


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distributed to each member in turn, members can take out loans at an agreed interest

rate (Mutesasira 1999). Members can theoretically take out a loan at any time and in

amounts aligned to their actual needs and opportunities. Furthermore, through the

interest paid on loans, members can earn a substantial return on their savings

contributions. However, ASCAs require slightly more complex record keeping than

ROSCAs.

The structure of ROSCAs and ASCAs provide a variety of benefits. Because

they are largely self-operated, transaction costs are relatively low and, therefore, they

are able to reach poorer individuals living in less densely populated areas (Johnson et

al. 2005). Both ROSCAs and ASCAs are also self-sufficient. They do not rely on

external infusions of capital, which may lead to a dependent relationship, decrease

members incentives to save and to monitor operations, or lead to investments in

projects that are too big and will not survive based on local demand and resources.

Risks are also relatively low because the process of self-selection allows for a high

level of mutual understanding and trust. However, the method of self-selection also

creates a risk of excluding the poorest members of society.

II. The VSLA Program

i. CARE in Tanzania

CARE is a non-political and non-sectarian, leading humanitarian organization

dedicated to the fight against global poverty. CARE was originally founded in 1945

to bring emergency relief to the survivors of WWII in Europe and East Asia, but over

the years the organization has expanded its work and now operates in more than 65


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developing countries across the globe. CAREs mission is to help tackle the

underlying causes of poverty so that people can become self-sufficient and live in

dignity and security. In service of that mission, CARE launched its first Village

Savings and Loan Association (VSLA) in Niger in 1991. Since then, CARE has

established more than 54,000 microfinance groups in twenty-one African countries,

serving over 1 million members (Allen and Staehle 2007).

CARE arrived in Tanzania in 1995 in order to assist with the influx of

refugees from neighboring Rwanda and Burundi. After its arrival, CARE recognized

a need for a greater variety of services, including establishing institutions to promote

sustainable development in the region. In April of 1995, in a partnership initiative

with the Department of Commercial Fruits and Forestry (DCFF), CARE established

the Jozani-Chwaka Bay Conservation Project (JCBCP) in Zanzibar, with the goal of

improving the livelihoods of communities adjacent to the area. The conservation area,

which sits about 22 miles (35km) south of Stone Town and covers approximately

6,200 acres, is an extremely rich mosaic of Zanzibar's diverse natural habitat,

including groundwater forest, mangroves, coral rag forest and salt marshes. The coral

rag zone serves as a haven for a variety of wildlife, including rare, endemic and

endangered species, such as the Zanzibar Red Colobus Monkey, Aders duiker and

the Zanzibar leopard (CARE Tanzania 2003).

JCBCP initiated a savings and credit scheme in August 1999 to assist

community members in financing conservation-friendly enterprise activities. The

program followed a Grameen Bank-type model in which loans were dispersed to

individuals organized in groups of five. Although the program was extended to


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almost 720 clients by April 2000, loan repayment quickly fell below 50 percent

(CARE Tanzania 2003). Under Ujamaa, the people of Tanzania had become

accustomed to government handouts, and they subsequently misinterpreted the loans

from CARE as simply a continuation of the government program. In response, CARE

restructured the program, eventually adopting the VSLA methodology, which was

piloted in Niger.

ii. The VSLA Methodology

The costs of bringing microfinance services to Africa is often considered

prohibitive, because of the abundance of sparsely populated areas, the higher rates of

illiteracy and HIV/AIDS, and a widespread lack of identity papers, all of which serve

to increase credit risk and transaction costs. The VSLA model overcomes many of

these obstacles and promises to reach the very poor and rural population better than

formal, centralized microfinance institutions. It essentially enables the poor to

become their own bankers.

A VSLA is an Accumulating Savings and Credit Association (ASCA), which

requires no external borrowing by, or donations to, the loan portfolio it is entirely

self-sufficient. Its work, therefore, falls within the informal sector. It differs from a

Savings and Credit Cooperative Organization (SACCO) in that it is does not receive

external funding, only training, and is not formally registered with the government,

which allows it to operate with less formal bookkeeping and thus be more user-

friendly for illiterate members. A VSLA allows for variable savings, unlimited

savings withdrawal, and loans with variable terms and flexible repayment conditions.

A single association consists of 15 to 30 people who save a small amount every week.


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A share is usually Tsh1,000 (US$0.90) with members contributing up to three shares

every week.1However, each group is able to determine their own share value and the

maximum number members can contribute each week. The value of each share

remains low so as to allow the poorest members to participate. The groups funds are

kept in a cash box that is fitted with three padlocks, the keys of which are held by

different officers in the group. This system improves transparency and makes it easier

to refuse loans to non-members, such as ones husband (Allen and Staehle 2007).

In addition to the savings fund, the cash box holds the social fund and the

education fund. The social fund is a self-insurance mechanism, which can provide

members with a small amount in the case of emergencies. Each member contributes a

set value every week, usually between Tsh200 (US$0.18) and Tsh400 depending on

the group. In the event of an emergency such as a fire or the death of a family

member, the fund dispenses a fixed amount, generally between Tsh10,000 (US$9)

and Tsh20,000 (US$18). No interest is charged for loans from the social fund and,

although members are expected to pay back the loans, repayment is not strictly

enforced. The social fund is managed separately from the savings and loan fund and

is not shared out at the end of the cycle and is thus carried over to the next cycle. Like

the social fund, weekly contributions to the education fund vary between groups, but

generally fall in the range of Tsh100 to Tsh200 per week. The education fund is used

to pay the nominal monthly training fee and to buy the necessary materials, such as

passbooks and the lockbox.

1In a county where the average weekly income is around Tsh26,400 (US$24), this represents a savingrate of approximately 8 percent. For the sake of comparison, the U.S. savings rate is around 5 percent.


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After several months, the savings shares accumulated by the group become

large enough to launch the loan function. All members have the right to take out a

loan regardless of the number of shares they have contributed, but can only take out a

loan equal to at most three times the value of their shares. Most loans are short-term,

generally around one month, at an interest rate determined by the group, usually 5

percent per month this is low compared to moneylenders who often charge up to 30

percent per month, but slightly higher than NGO-MFIs, which generally charge less

than 4 percent per month (Mutesasira 1999, 10). Each group is able to set their own

repayment terms. However, a VSLA never fines borrowers for late loan repayment as

this may aggravate any underlying crisis the household may be facing. It is assumed

that the embarrassment of being late is sufficient penalty (Allen and Staehle 2007,

10).

On a date chosen by the members, usually after about a year, the savings and

accrued interest are divided among the members in proportion to each individuals

savings. This event, known as an auction audit, is usually scheduled so as to occur

when members are most likely to need money, such as at the start of the school year

or before a major holiday, in order to encourage the use of savings to meet pressing

needs and discourage their use for unnecessary expenditures. After the disbursement

of funds, the groups normally re-form immediately and start a new cycle of savings

and lending.

The VSLA model is lauded for its transparency and adaptability for illiterate

members. All operations (deposits, withdrawals, loans, loan repayments) occur at

weekly meetings with the entire group present so that all activities remain transparent.


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Record keeping was also designed to be as simple and as transparent as possible.

Each member has an individual passbook, which is stamped every week, with each

stamp representing one share. Only the starting and closing balances of the social

fund as well as loan disbursement is recorded in the group ledger (Allen and Staehle

2007).

VSLAs are built entirely on member savings and interest from loans; they

receive no direct capital investment from CARE or any other supporting organization.

CAREs role is to supply extensive training on group dynamics, governance and

money management. VSLA training is based on a four-phase curriculum. During the

first phase - an intensive, three-month period - a field officer from CARE visits the

group every week and holds training sessions on group dynamics. The field officer

also selects and trains a Community Contact Person (CCP or village trainer) who

lives in the target community. The CCP is paid by the VSLA not by CARE. In the

second phase, the field officer visits the groups once or twice a month as they begin

to rely more on the CCP. In the third phase, after approximately a year of supervision,

if the CCP passes a certification test, the field officer will move on to another area

and start the process again. In the fourth phase, in the original VSLA model, once a

group is mature, it can function with no external support (Training Guide 2004).

However, CARE quickly realized that even mature groups could benefit from

additional monitoring and technical support. In order to respond to such needs while

maintaining a degree of self-sustainability, CARE developed a system known as an

Apex Organization, which would support and monitor existing groups while fostering

the growth of new groups, allowing CARE to move onto new areas.


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iii. Apex Organizations and the Sustainability of the VSLAs

As CARE prepared to leave Jozani Bay in 2003 after two years of successful

VSLA implementation in the area, the organization, together with the CCPs,

developed the Jozani Credit Development Organization (JOCDO). Today, JOCDO is

often sited as the prime example of an Apex organization. The Apex model, generally

lauded as a paradigm of sustainability, has been expanded throughout Tanzania and is

beginning to move across Sub-Saharan Africa.

An Apex organization is owned by the affiliated VSLA groups. It provides a

number of services to member VSLAs, but, like CARE, it does not provide direct

loan capital. The objectives of an Apex organization are: to serve as an umbrella

organization by promoting and protecting the interests of existing VSLA groups; to

assist in formation of new groups; to provide VSLA kits (cash boxes, pass books,

etc.) and other materials; to supervise the quality and standards of performance of

affiliated VSLA groups; to monitor groups and collect monthly data; and, finally, to

assist affiliated VSLAs through capacity building.

The Apex organization is responsible for the selection and training of new

Community Contact Persons (CCPs), who, in turn, are responsible for the formation

and training of new VSLA groups. The training of new groups under the Apex

organization essentially follows CAREs four-phase curriculum described above. The

greatest difference is that after a group is fully mature, they continue to receive

monthly visits from a CCP, either the original CCP who carried out the initial training

or the newly trained and certified CCP from the local community. At this point, the

role of the CCP becomes one of monitoring and technical assistance. He is expected


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to visit a mature group once a month to ensure quality control and before the final

payout of each cycle.

The organizational structure of an Apex organization is made up of a General

Assembly, a Board of Trustees, an Executive Committee, and a Director. However,

the VSLAs are always the main building blocks of an Apex organization (Mkoma

2009). Currently, JOCDO maintains a board of trustees selected from a group of

important members of the community; however, the board members are not involved

in the operations of the organization. All decisions are carried out by the executive

committee, which has twenty members, including a chairperson, secretary, assistant

secretary, treasurer, assistant treasurer, and an executive director. The position of

executive director is currently empty and will not be filled again until the election in

October 2010.

Every Apex organization, including JOCDO, is sustained by several income

sources. Each VSLA group pays an initial entry fee of Tsh60,000 (US$55) to the

Apex organization. Following the first year, the annual subscription fee for member

groups is Tsh15,000 (US$14) per year. In most groups, members contribute up to

three shares of Tsh1,000 (US$0.90) every week, yielding a total possible share value

of Tsh156,000 (US$142) per member and Tsh4,680,000 (US$4,255) per group.

Therefore, the initial entry fee represents, at a minimum, 1 percent of a groups

annual savings, while the yearly subscription fee corresponds to 0.3 percent of a

groups savings. As there is no external funding, these nominal fees denote the only

transaction costs of the VSLA program. The subscription fee covers basic support and

monitoring services. There are currently 233 VSLA groups in Zanzibar. However,


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only 106 of these groups are registered and paying members of JOCDO. As JOCDO

still provides a variety of support services for non-registered members, this presents a

major financial obstacle for JOCDO. However, JOCDO may also make a profit from

the sale of VSLA kits to groups at a small margin, usually around Tsh10,000 (US$9),

and also draws a cut of the training fee paid to the CCP from each VSLA for

example, from the Tsh3,000 (US$2.70), Tsh2,000 (US$1.80) is pocketed by the CCP

and Tsh1,000 (US$0.90) is sent to the Apex organization (Mkoma 2009).


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CHAPTER 2 Literature Review

As interest in microfinance has grown over the past three decades, so has the

compilation of related literature. The major findings of the key studies in the field are

presented below. These findings are summarized in Appendix A for convenience.

I. Impact of Microfinance

i. Financial AssetsMost studies have found that microfinance allows the poor to protect,

diversify and increase sources of income, which helps to smooth out income

fluctuations and to maintain consumption levels even during times of crisis. Zaman

(2000), who examines the Bangladesh Rural Advancement Committee (BRAC)s

impact on the welfare of its clients, finds that participation in micro-credit programs

reduces vulnerability by smoothing consumption, building assets, providing

emergency assistance during natural disasters, and empowering females. The

methodology of each study will be discussed in greater detail in Chapter 3, but the

results are generally considered robust. In addition to using a control group, Zaman

uses a Heckman two-step procedure, an advanced econometric technique, to control

for any biases in his estimation.


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MkNelly and Dunford (1999) also find a positive impact on income. They

control for potential biases by assigning communities to either a program or control

group following baseline data collection, thereby allowing program impact to be

measured through simple comparison between the treatment and the control group.

Their results show that the majority of participants (67 percent) of the CRECER

Credit with Education Program in Bolivia feel that their incomes have increased or

increased greatly since they joined the program. Additionally, MkNelly and

Dunford find that clients of Lower Pra Rural Bank Credit with Education Program in

Ghana have increased their incomes by $36 compared to $18 for non-clients. Clients

have also significantly diversified their income sources eighty percent of clients

have secondary sources of income compared to fifty percent of non-clients. Dunn and

Arbunkle (2001), who control for potential biases with the use of a control group and

a combination of advanced quantitative and qualitative methods, find that

microfinance clients in Lima, Peru have over 50 percent higher income than non-

participants.

Household income is often very difficult to measure in a survey format.

Therefore, household expenditure level is often used as a substitute for income to

determine overall program impact. Pitt and Khandker (1998) find that for participants

of the Grameen Bank, the Bangladesh Rural Advancement Committee (BRAC),

annual household consumption expenditure increases 18 taka for every 100 additional

taka borrowed by women, compared with 11 taka when the borrowers are men. They

control for participation endogeneity by using the specific design of the credit

programs to identify the effect of program credit, by gender of participant, in a


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limited-information-maximum-likelihood framework, and by controlling for

nonrandom program placement by using village-level fixed effects. Khandker (2005),

using a household-level fixed-effects model with panel data, which resolves both

household- and village-level endogeneity, finds that Pitt and Khandker (1998)

actually underestimated program impacts. He finds each additional 100 taka of credit

to women increased total annual household expenditure by more than 20 taka, but

finds no returns to male borrowing at all.

A few studies, however, have failed to find positive impacts on income from

microfinance participation. Masanjala and Tsoka (1997) find little impact of FINCA-

Malawi on living standards and expenditure patterns. Ssendi and Anderson (2009)

also find little long-term effect, as measured by increases in household assets.

However, both studies use a much less robust methodology and make little attempt to

control for selection bias.

ii. Poverty

A number of studies have found that access to microfinance services

decreases the incidence of poverty. Dunn and Arbunkle (2001) find that only 28

percent of microfinance clients in Lima, Peru live below the poverty line compared to

41 percent of non-clients. Khandker (2005) also finds positive effects on poverty

rates. He finds that between 1991/92 and 1998/99, moderate poverty in all villages

declined by 17 percentage points: 18 points in areas where Grameen Bank or BRAC

was active, and 13 points in non-program areas. Among program participants who

had been members since 1991/92, poverty rates declined by more than 20 percent

about 3 percentage points per year. Khandker estimates that more than half of this


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reduction is directly attributable to microfinance, and finds the impact to be greater

for extreme poverty than moderate poverty. Khandker further calculates that

microfinance programs reduce average village poverty level by one percentage point

each year in program areas. Microfinance thus helps not only poor participants but

also the local economy. Overall, Khandker finds that microfinance accounts for 40

percent of the entire reduction of moderate poverty in rural Bangladesh.

iii. Quality of Housing

Considering the difficulty in obtaining other measures of welfare, such as

income or even expenditure, in the majority of developing countries, the quality of

housing is often used as a proxy for a households socio-economic status. Overall, the

literature suggests a positive impact of microfinance program participation on both

the quality of housing as well as the level of investment. Hossain (1988), who

compares Grameen Bank members to both eligible non-participants in Grameen

villages and target non-participants in comparison village, finds that members spend

six times more on housing investments than non-members.

Neponen (2003), who uses a control group of new members to avoid selection

bias while monitoring the performance of microfinance program participants in

Trihcirappalli, India, finds that members of the microfinance program live in much

higher quality housing. Sixty-four percent of members live in tile roof and concrete

houses, which is considered to be the highest quality material available, compared to

only 50 percent of new members (the balance live in mud and thatch houses).


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iv. Education

In general, studies have found a positive impact of microfinance program

participation on education - children of microfinance clients are more likely to go to

school and stay in school longer (Neponen 2003; Littlefield et al. 2003). Barnes

(2001), who, like Dunn and Arbunkle (2001), controls for potential biases with the

use of a control group and a combination of advanced quantitative and qualitative

methods, finds that the Zambuko Trust program in Zimbabwe has a positive impact

on the education of boys aged 6 to 16. However, the program has no effect on the

education of girls within the client-household. Pitt and Khandker (1998), however,

find that microfinance program participation increases the probability of enrollment

for girls. On the other hand, Coleman (1999), who controls for participation

endogeneity through the use of a quasi-experimental design, finds little impact on

education expenditures, which may be seen as a proxy for either access to or quality

of education.

v. Nutrition and Health

Households of microfinance clients, particularly those of female clients,

appear to have better nutrition and health statuses compared to non-client households

(Pronyk et al. 2007; Littlefield et al. 2003; Hossain 1988). Pitt et al. (2003) find that

womens credit has a large and statistically significant impact on two of three

measures of childrens health. A 10 percent increase in credit provided to females

increases the arm circumference of their daughters by 6.3 percent - twice the increase

that would be expected from a proportionately similar increase in credit provided to

men. Female credit also has a significant and positive, but somewhat smaller effect on


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the arm circumference of sons. Female credit is estimated to have large, positive and

statistically significant effects on the height-for-age of both boys and girls. However,

no statistically significant effects are found for body mass index (BMI) of boys or

girls.

Barnes (2001) finds that participation in Zambuko Trust in Zimbabwe has a

positive impact on the frequency with which food is consumed in extremely poor

households as well as on the quality of food. Specifically, participation has led to a

positive impact on the consumption of high protein foods (meat, fish, chicken and

milk). MkNelly and Dunford (1999) also find that children of participants of the

Lower Pra Rural Bank Credit program in Ghana experience significant improvements

in feeding frequency compared to children of non-clients. However, positive impacts

on the nutritional status of clients of the CRECER Credit program in Bolivia and their

children are not evident. Deeper analysis of the client group alone, however, reveals

that childrens weight-for-age is positively related with the quality of education

services provided. This finding suggests that without important improvements in

caregiver practices, increases in income and even empowerment are unlikely to bring

about marked improvement in childrens nutritional status.

vi. Empowerment and Social Status of women

Numerous studies have found that targeting women as clients is an effective

method of ensuring that benefits of increased income accrue to the general welfare of

the family (Pitt and Khandker 1998, 2003; Khandker 2005; Strauss and Beegle 1996;

Hoddinott and Haddad 1994). Such gender-targeted microfinance has also been


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shown to have a positive effect on the empowerment and equality of women

(Mwenda and Muuka 2004).

Hashemi, Schuler and Riley (1996), in an attempt to deal with the

complexities and ambiguities of the meaning of empowerment, create a composite

empowerment indicator based on eight components: mobility, economic security,

ability to make small purchases, ability to make larger purchases, involvement in

major household decisions, relative freedom from domination within the family,

political and legal awareness, and involvement in political campaigning and protests.

A woman is considered empowered if she scores positively on 5 out of the 8

components. Using a combination of sample survey and case study data and

controlling for selection bias by statistically controlling for differences in

demographic characteristics such as age, education and wealth, Hashemi et al. find

that membership in either the Grameen Bank or the BRAC has significant effects on

all eight dimensions. They find that each year of membership in either program

increases the likelihood of a female client being empowered by 16 percent. Even

women who do not participate in the program are more than twice as likely to be

empowered simply by living in Grameen villages. The authors argue that credit

programs empower women by strengthening their economic roles, increasing their

ability to contribute to their families income, enabling them to establish an identity

outside of the family, and giving them experience and self-confidence in the public

sphere.

Terry (2006) finds that loans from FINCA-Tanzania create major positive

changes in the lives of female borrowers, including an improvement in social status


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and self-esteem, and an increase in confidence. Women also feel empowered through

an increase in income and the ability to accumulate savings, purchase household

assets and contribute towards childrens education. The findings also suggest that

members of the household and the community, at large, view female participants in a

more positive way. However, Terry relies completely on qualitative data and does not

include a control group. Therefore, the results of the study are not necessarily reliable.

II. Microsaving

Recently, practitioners have begun to increasingly acknowledge the

importance of savings mechanisms. Research has even found that most people prefer

savings to credit (Hirschland 2005).Furthermore, small loans are not always

appropriate for poor women (Kabeer 2001). A loan becomes a debt, and the poor

often face a crisis if an expected source for repayment evaporates. Therefore,

borrowing is often much riskier than saving. Because starting a new business is risky

and sustainable providers of credit cannot afford to lose money, credit is generally not

used to start a new business but rather to expand an existing one. Therefore, most

people must rely on savings to start up new business ventures. Savings enables future

investment, by giving access to lump sums of money. These large sums of money can

be used for investment opportunities, for life cycle events, such as marriages,

funerals, etc., or for emergencies. Savings can also be used to smooth consumption.

Furthermore, while borrowers pay interest, savers can earn interest. Finally, although

not everyone is creditworthy or is willing to take such risk, all people are deposit-

worthy and want to develop assets.


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Savings clearly offers substantial benefits and correspondingly, in general,

savings programs have been shown to have a positive impact on participants. Dupas

and Robinson (2009), who used a unique study design that controlled for potential

biases while allowing for the use of simple regression analysis, find that access to a

formal savings account has substantial positive impacts on womens productive

investment levels and expenditures, and also makes women less vulnerable to shocks

from illness.

Chen and Snodgrass (2001), who rely on a similar method to that of Barnes

(2001) and Dunn and Arbunkle (2001) to control for potential biases, also find a

positive impact of savings. Although the impact of savings is smaller than that of

borrowing, income of savers is more stable than that of borrowers. Chen and

Snodgrass compare the impact of SEWA Bank on clients who borrow to those who

save without borrowing, and compare both groups to non-clients (who are drawn

randomly from women engaged in the informal sector in the same neighborhood as

clients in Ahmedabad, Gujarat, where SEWA is based).

In round 1, the borrowers were shown to be considerably better off than

savers, who were in turn better off than non-participants. Some of these differences

may be attributable to participation in SEWA prior to the round 1 survey. However,

between the two rounds, the savers showed the fastest rate of income growth. Still,

borrowers income was over 20 percent greater than that of savers, and 40 percent

higher than that of non-participants. Savers, however, enjoy an income, which is 20

percent greater than that of non-participants. For borrowers, the findings show a

mixed report of the impact on poverty - the numbers of households with incomes


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below $1/day and those above $2/day (the World Banks official cut-off line for

absolute poverty and moderate poverty respectively) both increased between

rounds. Borrowers experienced the largest increase in the number of non-poor

households between rounds, but they also had the most households that slipped to a

lower poverty category. Saver householders were less volatile with the numbers in

both the $1-2 range and above $2 rising, demonstrating again the lower risk involved

in saving. Overall, the results suggest that the use of either credit or savings services

raises household income, both total and per capita. The use of financial services, in

general, is also associated with increased spending on housing improvements,

consumer durables and school enrollment, especially for boys.

III. ROSCA/ASCA Participation

Recently, an increasing amount of literature has attempted to specifically

explain ROSCA participation. As there is no interest to be gained by saving in a

ROSCA, the question is, why do individuals choose to save through a ROSCA

instead of individually accumulating savings? Besley, Coate and Loury (1993) argue

that individuals who have no access to credit may choose to join a ROSCA to finance

the purchase of indivisible durable goods, taking advantage of the gains from

intertemporal trade between individuals. Anderson and Baland (2002) argue that

ROSCA participation is a strategy used by women to protect their savings against

claims from their husbands. Dupas and Robinson (2009) expand upon this theory by

suggesting that women also face constant demands from other relatives and neighbors

and may find it difficult to refuse requests if the money is available in the house.


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Bauer and Morduch (2008), Gugerty (2007), and Dagnelie and LeMay-Boucher

(2008) suggest that individuals use participation in a ROSCA as a device to commit

themselves to save money and to deal with self-control problems. Although ASCAs,

unlike ROSCAs, do generally provide interest on savings that comes from interest

payment on loans, it is often a small amount. As such, much of the literature on

ROSCA participation probably can be applied to participation in ASCAs as well.

IV. VSLA Performance

Despite the apparent success of the VSLA model, few detailed studies of the

models performance have been undertaken. Allen and Hobane (2004) conclude that,

in Zimbabwe, membership in a VSLA contributes to an increase in household

productive and non-productive asset levels among the majority of participants, as well

as to some improvement in quality of housing. The findings also suggest that program

participation has led to an increase in the number of income-generating activities

(IGAs) and to an increase in stability of such activities. Households also allocate

more labor to IGAs. Furthermore, 81 percent of respondents feel that their status in

community has improved. However, it is difficult to attribute these results to the

interventions of the VSLAs alone. The study has no control or comparison group and

relies on recall data for a period of four years, which may not yield accurate

information, as people tend to forget what their status was four years ago.

However, Anyango (2005) reaches similar conclusions as Allen and Hobane

(2004) when studying the VSLA program in Malawi. He finds that program

participation has helped to improve the livelihoods of its members and to alleviate


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poverty, particularly for women who constitute the majority of the groups. Number

and magnitude of economic activities has increased as a result of participation in the

program. However, members have divested away from certain economic activities

that require greater capital. The study also does not have a control group, although it

does have a baseline. The baseline, however, is taken at the community level.

Therefore, there may be a selection bias if the members of the VSLA systematically

differ from the members of the community.

There have been two major studies done on the VSLA program in Tanzania.

The most extensive study is the Womens Empowerment Strategic Impact Inquiry

(SII), which was completed in 2006. The study incorporates a quantitative

questionnaire, which was given to 181 women, including 134 VSLA members and 47

non-members. In addition to several case studies, a series of focus group discussions

were carried out to explore more deeply the issues raised in the questionnaire.

Baseline data was not available, but the authors attempt to address the problem by

asking questions linking participation to changes in the impact variables, and

requesting respondents to compare their current situation to their situation prior to

joining VSLA group. The greatest weakness of the study is that the quantitative data

are not tested for statistical significance. The assessment of significance is therefore

based on the judgment of the research team and is thus largely subjective.

The study finds, in terms of short-term economic empowerment, VSLA

women benefit more than non-VSLA members from increased savings, more IGAs,

greater food security and health, and increased education expenditures. Most VSLA

women (75 percent) have increased their savings since joining VSLA group. VSLA


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women are more likely (68 percent) to be engaged in an IGA than non-VSLA women

(13 percent), with most VSLA women reporting the VSLA group as the source of

funds for their IGA. Furthermore, VSLA womens households experience greater

food security compared to non-VSLA households. More VSLA households also

report a great improvement in the quantity and quality of meals over the last 3 years,

compared to non-VSLA households. Thirty-four percent of VSLA households report

improved family health over the last three years compared to 22 percent of non-

VSLA households. About twice as many VSLA households (57.3 percent) as non-

VSLA households (30.4 percent) report an improvement in the education status of

family members over the past three years. A higher proportion of VSLA households

(79.9 percent) have made expenditures on education over the last 12 months, than

have non-VSLA households (65.2 percent).

In terms of long-term economic empowerment, the SII finds more VSLA

women own household and productive assets than non-VSLA women. For each asset

category, between 40-77 percent of the women have acquired assets with funds (loans

or payouts) directly from the VSLA group. The other women have acquired assets

with revenue from IGA or some other source. Moreover, compared to non-VSLA

women, almost twice as many VSLA women have made investments in housing

during the last three years. Although VSLA membership is not a necessary condition

for womens investment in long-term assets, the study indicates that VSLA

participation increases womens chances of making such investments.

In the case of womens social empowerment, the SII study finds that VSLA

women demonstrate more confidence than their non-VSLA counterparts and appear


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more motivated to take action to improve their lives. VSLA women also have more

freedom to participate in community social activities than non-VSLA women.

Finally, VSLA women have more control over decisions to engage in income-

generating activities and to spend time income accruing than do non-VSLA women.

The other major study in Tanzania, and the precursor to this study, was

Anyango et al.s (2006) examination of the performance of VSLA groups in

Zanzibar. The study, however, does not have a baseline and does not use a control

group. No tests of statistical significance were performed. The study finds that

VSLAs in Zanzibar have performed well in terms of growth and sustainability. Total

membership rose 258 percent from 2002 to 2006. They have also performed well in

terms of profitability during the last payout for all 25 groups, members received up

to a 53 percent rate of return on savings. Respondents also name improved standard

of living (22 percent), improved housing (21 percent) and increased income (20

percent) as three major changes as a result of VSLA program participation.

Although the results from Anyango et al. (2006) are promising, the study

suffers from several methodological weaknesses and therefore its results are not

entirely reliable. This study therefore aims to expand and improve upon this work,

and the entire set of literature concerning VSLA performance and microfinance

impact.


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CHAPTER 3 Research Design, Methods, & Sample

I. Impact Assessment Methodologies

From the wealth of literature referenced above it is clear that in the last fifteen

years impact assessment has become an increasingly important aspect of development

activity as international agencies and aid donors, in particular, have sought assurance

that aid funds are well spent. There are several methodological options for conducting

impact assessments, which can be roughly grouped into two different paradigms: the

scientific method and the humanities tradition (Hulme 2000).

The scientific method seeks, through experimentation, to ensure that

outcomes can be directly attributed to inputs. In the social sciences, however,

controlled experiments are difficult and often impossible to arrange. Therefore, most

social scientists have come to rely on the control group method, which involves

comparisons between a treatment group and an identical group (or as nearly

identical as possible) that did not receive the treatment. This method allows for

stronger estimations of program impacts and more robust conclusions of causality.

By contrast, the humanities tradition eschews statistical tools and proof of

impact. Rather, the humanities tradition seeks to interpret the processes involved and

to explore the range of plausible impacts, using mainly qualitative data. Although it is

considerably more

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Isal Impact Analysis