Financial Services Association (FSA): Concept and Some Lessons Learnt
The FSA is an approach to rural finance which combines aspects of an investment company focusing on risk capital, financial returns, and shareholder value with aspects of community finance, focusing on local accessibility, user ownership, and outreach to the poor. The FSA model offers the attractive prospect of high returns for investors providing risk capital, through high-demand loans, the application of commercial interest rates, and an intelligent mode of capping expenditure relative to earnings. At the same time, the FSA offers cost-effective and accessible financial services to the local community: the FSA model allows for local ownership, allowing the FSA to be highly responsive to community needs and elevating user trust and commitment. This article provides a useful overview of the FSA model which will be helpful to those considering alternatives to more traditional financial institutions.
The FSA is well-designed to overcome many of the problems besetting rural financial institutions. To avoid the usual gulf that exists between primarily urban commercial banks and a rural clientele, the FSA is locally-owned and locally-run, making it highly responsive to the specific needs of the community it serves. Users are compelled to be shareholders. This guarantees a closer relationship between the user and the institution, with a consequent decline in loan default rates. As it is owned and run by its users, though day-to-day management is in the hands of third parties, the FSA is a particularly flexible and sensitive institution at a local level. Payment of the very pared-down staff is based on a proportion of profits, thereby providing an incentive for good performance.
Perhaps the primary attraction of the FSA is that it functions as a profit-driven business rather than a donor-driven NGO or a credit union, thus avoiding many of the problems affecting those institutions. It is conceived as a “money shop”, not merely a community service, and shareholders can reasonably expect a return on their investment. The model has been tried with success in sub-Saharan Africa and the author postulates that it could find success in central Asia, where he has done preliminary fieldwork. However, there is no clear reason why this model could not be universally applicable in any community where cash is circling and where a demand for business loans exists.
There are problems with the FSA model, particularly in the area of regulation and supervision. This article mentions several methods of addressing this problem, including external bank supervision, a rating agency, and franchising/licensing. All these solutions create problems of their own and the author does not satisfactorily address them, suggesting instead the possible solution of a voluntary regulatory association formed of groups of FSAs, an idea that needs more development. Individual case studies from a sample country, Uganda, show the variety of successes and the spectrum of problems facing the FSA model. The next decade will show how successfully the FSA can educate its members in good financial practices, and what regulatory solutions work best. Until it stabilises, the FSA model must still be considered a work in progress, but its achievements in bringing financial services to the rural poor so far are encouraging. This report gives a balanced and thoughtful summary of the institution and its functioning: particularly useful is its last section, “Lessons Learnt”, which offers a quick survey of the institution’s ups and downs so far.