MICRO
FINANCE CREDIT LENDING MODELS ACROSS THE WORLD
Introduction
"Microfinance:Credit Lending Models" is an attempt to document
the various models currently being used by microfinance institutions throughout
the world.
A total of 14 models are described below. They include, associations,
bank guarantees, community banking, cooperatives, credit unions, grameen,
group, individual, intermediaries, NGOs, peer pressure, ROSCAs, small business,
and village banking models.
In reality, the models are loosely related with each other, and most good
and sustainable microfinance institutions have features of two or more models
in their activities.
Many of these models are in deed "formalized" versions of
informal financial systems. Informal systems have historical precedents that
predate modern banking systems. They are still in existence today used mostly
by low-incoe households who do not have access to formal banks. GDRC has
developed a continuum of informal credit suppliers that clearly illustrates the
link between such informal systems and the models illustrated below.
The models were developed through extensive field work/observations and
interviews carried out in India, Thailand, Philippines, Indonesia and Sri
Lanka, and includes information from literature as well.
Associations
Model
This is where the target community forms an 'association' through which
various microfinance (and other) activities are initiated. Such activities may
include savings. Associations or groups can be composed of youth, women; can
form around political/religious/cultural issues; can create support structures
for microenterprises and other work-based issues.
In some countries, an 'association' can be a legal body that has certain
advantages such as collection of fees, insurance, tax breaks and other
protective measures. Distinction is made between associations, community
groups, peoples organizations, etc. on one hand (which are mass, community
based) and NGOs, etc. which are essentially external organizations.
Closely related to the group model and similar models.
Bank
Guarantees Model
As the name suggests, a bank guarantee is used to obtain a loan from a
commercial bank. This guarantee may be arranged externally (through a
donor/donation, government agency etc.) or internally (using member savings).
Loans obtained may be given directly to an individual, or they may be given to
a self-formed group.
Bank Guarantee is a form of capital guarantee scheme. Guaranteed funds
may be used for various purposes, including loan recovery and insurance claims.
Several international and UN organizations have been creating international
guarantee funds that banks and NGOs can subscribe to, to onlend or start
microcredit programmes.
Community
Banking Model
Community Banking model essentially treats the whole community as one
unit, and establishes semi-formal or formal institutions through which
microfinance is dispensed. Such institutions are usually formed by extensive
help from NGOs and other organizations, who also train the community members in
various financial activities of the community bank.
These institutions may have savings components and other
income-generating projects included in their structure. In many cases,
community banks are also part of larger community development programmes which
use finance as an inducement for action.
Closely related to the village banking
model.
Cooperatives
Model
A co-operative is an autonomous association of persons united voluntarily
to meet their common economic, social, and cultural needs and aspirations
through a jointly-owned and democratically-controlled enterprise. Some
cooperatives include member-financing and savings activities in their
mandate.see the International Cooperative Alliance website for more details.
Credit Unions Model
A credit union is a unique member-driven, self-help financial
institution. It is organized by and comprised of members of a particular group
or organization, who agree to save their money together and to make loans to
each other at reasonable rates of interest.The members are people of some
common bond: working for the same employer; belonging to the same church, labor
union, social fraternity, etc.; or living/working in the same community. A
credit union's membership is open to all who belong to the group, regardless of
race, religion, color or creed.A credit union is a democratic, not-for-profit
financial cooperative. Each is owned and governed by its members, with members
having a vote in the election of directors and committee representatives.
Grameen
Model
The Grameen model emerged from the poor-focussed grassroots institution,
Grameen Bank, started by Prof. Mohammed Yunus in Bangladesh. It essentially
adopts the following methodology:
A bank unit is set up with a Field Manager and a number of bank workers,
covering an area of about 15 to 22 villages. The manager and workers start by
visiting villages to familiarize themselves with the local milieu in which they
will be operating and identify prospective clientele, as well as explain the
purpose, functions, and mode of operation of the bank to the local population.
Groups of five prospective borrowers are formed; in the first stage, only
two of them are eligible for, and receive, a loan. The group is observed for a
month to see if the members are conforming to rules of the bank.
Only if the first two borrowers repay the principal plus interest over a
period of fifty weeks do other members of the group become eligible themselves
for a loan.
Because of these restrictions, there is substantial group pressure to
keep individual records clear. In this sense , collective responsibility of the
group serves as collateral on the loan.
More information on Grameen Bank can be found in the Case Studies
section.
Group Model
The Group Model's basic philosophy lies in the fact that shortcomings and
weaknesses at the individual level are overcome by the collective
responsibility and security afforded by the formation of a group of such
individuals.
The collective coming together of individual members is used for a number
of purposes: educating and awareness building, collective bargaining power,
peer pressure etc.
The Group model is closely related to, and has inspired, many other
lending models. These include Grameen, community banking, village banking, self-help,
solidarity, peer pressure etc.
One example of the Group Model is "Joint Liability". When a
group takes out a loan, they are jointly liable to repay the loan when one of
the group's members defaults on the repayments.
Several resources for the group model can be found in the Capacity
Building for Microfinance section.
Individual Model
This is a straight forward credit lending model where micro loans are
given directly to the borrower. It does not include the formation of groups, or
generating peer pressures to ensure repayment.
The individual model is, in many cases, a part of a larger 'credit plus'
programme, where other socio-economic services such as skill development,
education, and other outreach services are provided.
Intermediaries Model
Intermediary model of credit lending positions a 'go-between'
organization between the lenders and borrowers. The intermediary plays a
critical role of generating credit awareness and education among the borrowers
(including, in some cases, starting savings programmes. These activities are
geared towards raising the 'credit worthiness' of the borrowers to a level
sufficient enough to make them attractive to the lenders.
The links developed by the intermediaries could cover funding, programme
links, training and education, and research. Such activities can take place at
various levels from international and national to regional, local and
individual levels.
Intermediaries could be individual lenders, NGOs,
microenterprise/microcredit programmes, and commercial banks (for government
financed programmes). Lenders could be government agencies, commercial banks,
international donors, etc.
Most models mentioned here invariably have some form of organizational or
operational intermediary - dealing directly with microcredit, or non-financial
services. Also called the 'partnership' model. Specifically see NGOs.
NGO Model
NGOs have emerged as a key player in the field of microcredit. They have
played the role of intermediary in various dimensions. NGOs have been active in
starting and participating in microcredit programmes. This includes creating
awareness of the importance of microcredit within the community, as well as
various national and international donor agencies.
They have developed resources and tools for communities and microcredit
organizations to monitor progress and identify good practices. They have also
created opportunities to learn about the principles and practice of
microcredit. This includes publications, workshops and seminars, and training
programmes.
Peer Pressure Model
Peer pressure uses moral and other linkages between borrowers and project
participants to ensure participation and repayment in microcredit programmes.
Peers could be other members in a borrowers group (where, unless the initial
borrowers in a group repay, the other members do not receive loans. Hence
pressure is put on the initial members to repay); community leaders (usually
identified, nurtured and trained by external NGOs); NGOs themselves and their
field officers; banks etc.
The 'pressure' applied can be in the form of frequent visits to the
defaulter, community meetings where they are identified and requested to comply
etc.The Grameen model extensively uses peer pressure to ensure repayment among
its borrower groups.
ROSCA Model
Rotating Savings and Credit Associations or ROSCAs, are essentially a
group of individuals who come together and make regular cyclical contributions
to a common fund, which is then given as a lump sum to one member in each
cycle.
For example, a group of 12 persons may contribute Rs. 100 (US$33) per
month for 12 months. The Rs. 1,200 collected each month is given to one member.
Thus, a member will 'lend' money to other members through his regular monthly
contributions.
After having received the lump sum amount when it is his turn (i.e.
'borrow' from the group), he then pays back the amount in regular/further
monthly contributions. Deciding who receives the lump sum is done by consensus,
by lottery, by bidding or other agreed methods.
Small Business Model
The prevailing vision of the 'informal sector' is one of survival, low
productivity and very little value added. But this has been changing, as more
and more importance is placed on small and medium enterprises (SMEs) - for
generating employment, for increasing income and providing services which are
lacking.
Policies have generally focussed on direct interventions in the form of
supporting systems such as training, technical advice, management principles
etc.; and indirect interventions in the form of an enabling policy and market
environment.
A key component that is always incorporated as a sort of common
denominator has been finance, specifically microcredit - in different forms and
for different uses. Microcredit has been provided to SMEs directly, or as a part
of a larger enterprise development programme, along with other inputs.
Village Banking Model
Village banks are community-based credit and savings associations. They
typically consist of 25 to 50 low-income individuals who are seeking to improve
their lives through self-employment activities.
Initial loan capital for the village bank may come from an external
source, but the members themselves run the bank: they choose their members,
elect their own officers, establish their own by-laws, distribute loans to
individuals, collect payments and savings. Their loans are backed, not by goods
or property, but by moral collateral: the promise that the group stands behind
each individual loan.
The Village Banking model is closely related to the Community Banking and
Group models. This model is widely adopted and implemented by FINCA. See their
Village Banking Homepage.
MICRO FINANCE INSTITUTIONS::
Microfinance or
Micro Credit is defined as provision of thrift, credit and other financial
services and products of very small amount to the poor in rural, semi-urban and
urban areas for enabling them to raise their income levels and improve living
standards.
Since the latter
half of 2010 Micro Finance Institutions (MFIs) have come under the scanner of
public and journalistic scrutiny, particularly in Andhra Pradesh, due to a
variety of reasons.
RBI constituted a
Sub-Committee of the Central Board of Directors of RBI headed by Shri Y. H.
Malegam, commonly known as Malegam Committee, to study Issues and Concerns in the
MFI Sector in October 2010. The committee has now presented its report.
A microfinance
institution (MFI) is an organization that provides financial services to the
poor. This very broad definition includes a wide range of providers that vary
in their legal structure, mission, and methodology. However, all share the
common characteristic of providing financial services to clients who are poorer
and more vulnerable than traditional bank clients.
Alternatively, MFIs
are institutions devoted exclusively to microfinance.
Microfinance
Microfinance or Micro Credit is defined as provision of thrift, credit and
other financial services and products of very small amount to the poor in
rural, semi-urban and urban areas for enabling them to raise their income levels
and improve living standards. Formally, microfinance service has been defined
in the Microfinance Services Regulation Bill as providing financial assistance
to an individual or an eligible client, either directly or through a group
mechanism for:
i. an amount, not exceeding rupees fifty
thousand in aggregate per individual, for small and tiny enterprise,
agriculture, allied activities (including for consumption purposes of such
individual) or
ii. an amount not
exceeding rupees one lac fifty thousand in aggregate per individual for
housing purposes,
or
iii. such other
amounts, for any of the purposes mentioned at items (i) and (ii) above or other
purposes, as may be prescribed.
Categorization of MFIs
MFIs can be
categorized as formal, semi-formal or informal.
Formal MFIs are
defined as those that are subject not only to general laws but also to specific
banking regulation and supervision (development banks, savings and postal
banks, commercial banks, and non-bank financial intermediaries).
Formal providers
may also be any registered legal organizations offering any kind of financial
services.
Semiformal MFIs are
registered entities subject to general and commercial laws but are not usually
under bank regulation and supervision (financial NGOs, credit unions and
cooperatives). Informal MFIs are non-registered groups such as rotating savings
and credit associations and self-help groups.
Ownership
structures
MFIs can be
government-owned, like the rural credit cooperatives in China; member-owned,
like the credit unions in West Africa; socially minded shareholders, like many
transformed NGOs in Latin America; and profit-maximizing shareholders, like the
microfinance banks in Eastern Europe. The types of services offered are limited
by what is allowed by the legal structure of the provider: non-regulated
institutions are not generally allowed to provide savings or insurance.
Role MFIs could
play a significant role in facilitating inclusion, as they are uniquely
positioned in reaching out to the rural poor. Many of them operate in a limited
geographical area, have a greater understanding of the issues specific to the
rural poor, enjoy greater acceptability amongst the rural poor and have
flexibility in operations providing a level of comfort to their clientele.
Current Issues
Since the latter
half of 2010 Micro Finance Institutions (MFIs) have come under the scanner of
public and journalistic scrutiny, particularly in Andhra Pradesh, due to a
variety of reasons ranging from the issue of corporate governance in one of the
leading MFIs to rural suicides purportedly caused by strong arm recovery
tactics of MFIs. Following reports of rural distress apparently caused by the
‘avarice’ of MFIs, the Andhra Pradesh govt. sought clarification from the RBI
on regulation of MFIs, specially regarding cap on interest rate. The RBI took
the stance that it could regulate only the activities of MFIs registered with
it as non-banking finance companies. Although these cover over 80% of
microfinance business, in terms of numbers they comprise a small percentage of
the total numbers of MFIs in the country. Subsequently, RBI constituted s
Sub-Committee of the Central Board of Directors of RBI headed by Shri Y. H.
Malegam, commonly known as Malegam Committee, to study Issues and Concerns in the
MFI Sector in October 2010. The committee has now presented its report..
Malegam Committee Report
The Sub-committee
has made a number of recommendations to mitigate the problems of
multiple-lending, over borrowing, ghost borrowers and coercive methods of
recovery.
These include :
1. A borrower can
be a member of only one Self-Help Group (SHG) or a Joint Liability Group (JLG)
2. Not more than
two MFIs can lend to a single borrower
3. There should be
a minimum period of moratorium between the disbursement of loan and the
commencement of recovery
4. The tenure of
the loan must vary with its amount
5. A Credit
Information Bureau has to be established
6. The primary
responsibility for avoidance of coercive methods of recovery must lie with the
MFI and its management
7. RBI must prepare
a draft Customer Protection Code to be adopted by all MFIs
8. There must be
grievance redressal procedures and establishment of ombudsmen
9. All MFIs must
observe a specified Code of Corporate Governance
For monitoring
compliance with regulations, the Sub-Committee has proposed a four-pillar
approach with the
responsibility being shared by MFIs, industry associations, banks and RBI.
