Question

discuss five well known microfinance approaches

Answer 1

Individual lending is the oldest form of microlending and most closely approximates traditional commercial bank lending. Developers of individual lending programs attempt to modify bank methods to better meet the needs of lowincome borrowers and at the same time allow banks to earn a reasonable profit and be assured default rates are kept under control. This is not an easy task. The general strategy to reach the underprivileged is to relax loan requirements for the poor. Still, somehow these loans must be secured, either by the borrower’s collateral and/or by cosigners, or they are disbursed to groups, where members of the group guarantee the repayment of each other’s loans. To further reduce the risk of default, loan officers investigate the creditworthiness of the borrower and the soundness of the operating business or business plan. These procedures take time. Often several weeks lapse between loan application and disbursement of money.

Latin American solidarity groups consist of four to seven members. Groups selfselect members and guarantee each other’s loans. A new cycle of loans cannot be started until all loans taken out by group members have been repaid. Initial loans are small, in the neighborhood of $50, and repayment is required in two to three months. When members repay their loan on time their credit limit for the next loan is increased by about 20 percent, up to a maximum of about $300. Interest rates are normally higher than commercial banks, but lower than moneylenders. Clients are usually required to deposit regular savings if they want to be part of the group; savings cannot be withdrawn until the member leaves the group. Savings serve as a compensating balance, guaranteeing a portion of the loan. The microfinance institution gets loan capital from grants or loans from development or commercial organizations. The goal of the microfinance institution is to reach sustainability. If the microfinance institution is not sustainable, its clients will again be without financial services. To achieve sustainability they must earn enough profit from their group lending activities to repay any loans and build up their own lending fund. Therefore, interest rates plus any client fees must be set to cover operating costs, repayment of any loans plus inflation, and an extra amount to develop a self-sustaining loan fund. To generate the needed profit, costs must be kept low.

The Grameen Bank is, without doubt, the most widely known microfinance institution in the world. Grameen-style lending programs form small, five-member self-selected solidarity lending groups that are then incorporated into village “centers” composed of up to eight of these lending groups. These centers are then grouped into regional branch offices. Thus, the institution is built “from the ground up,” with clients or members assuming responsibility for much of the management of financial services. Over 94 percent of clients are women, and loans are used for income-generating activities. Loans are repaid over one year with weekly payments. In 1983, the Bangladesh government licensed Grameen as a bank. Groups are self-selected and manage themselves, making decisions as to which members receive loans. New groups must meet and save for a minimum of four to eight weeks before group members become eligible for their first loan. New borrowers initially receive small loan amounts, payable over periods of up to 12 months. When clients have established a good repayment history, loan amounts are increased. Loans range from $50 to $300. Members are required to save a percentage of their loan (generally five percent) over the loan repayment term through regular weekly installments. When members leave the group, they receive their portion of accumulated savings.

Village banking (VB) was developed by FINCA, a U.S. NGO, through its work in Central America. It is probably the most commonly practiced communitymanaged loan fund methodology. A village bank is generally comprised of 30 to 50 members, mostly women. Bank members elect a management committee, which approves loans, collects savings and loan payments, and does most of the bookkeeping. (CARE Savings and Credit Sourcebook, Charles Waterfield and Ann Duval, CARE, New York, 1996 p. 110.) The bank is financed through internal mobilization of members’ funds (managed through an internal account), as well as through loans provided by the lending institution (managed through an external account). The external account is funded by a loan made to the village bank at commercial interest rates. The term of this loan is usually 10 to 12 months. All village bank members are responsible for repaying the village bank’s loan and interest on that loan. Over time, the internal account, which is comprised of members’ savings, share capital, and accumulated interest, is expected to grow large enough to replace the external account. An important objective of this methodology is that within a three-year period each village bank will be independent financially and in the administration of the bank.

Credit unions (CUs) rely totally on the savings and fees paid by their members to build a loan fund. They are financially independent from their creation. Community-based CUs often consist of 30 to 100 members. A field agent assists in the formation of the group and provides technical assistance. CUs set their own terms and conditions for loans to be made to individual members. The amount of a member’s loan is often determined by the amount the individual has saved. CUs may use members’ savings to secure a loan or may require some form of collateral to guarantee loans. The collateral might be a small household asset, a bicycle, or a goat. However, like Latin American solidarity groups, the Grameen Bank, and village banks, CUs rely primarily on their knowledge of the individual member and local operating environment to make sound loan approval decisions. The loan committee may advise the lender to revise his or her business idea before a loan is granted.