8 microfinance lending models

8 Microfinance Lending Models (Types of MFIs)Posted by Fehmeen on April 3rd 2010 | 4 Comments

Microfinance itself is a credit lending model and within this lending model exist several subcategories ie microfinance lending models which differ in terms of where their funds are sourced from and how the money is governed This post briefly mentions each lending model (explained in detail at GDRCrsquos website) and lists microfinance providers that follow these models

Microfinance Lending Model 1 Associations

An association is formed by the poor in the target community to offer microfinance services (micro savings microcredit micro-insurance etc) to themselves The association which can form on the basis of gender religion or political and cultural orientation of its members then gathers capital and intermediates between banks MFIs and its members

Example Self Help Groups SHGs (India)

Microfinance Lending Model 2 Bank Guarantees

A donor or government agency guarantees microloans made by a microfinancecommercial bank to an individual or group of borrowers Compulsory deposits by borrowers in such banks are also included in this model

Examples AfriCap Microfinance Fund (Mauritius) Bellwether Microfinance Fund (India) Latin America Bridge Fund Microfinance Credit Guarantee Facility (Pakistan)

Microfinance Lending Model 3 Community Banking Grameen Bank Village Banking

Community BanksVillage Banks are formal versions of lsquoassociationsrsquo and are created by members of a target community who wish to improve their living standards and to generate employment By offering microfinance services these banks seek to develop their communities

Guarantees are provided by social collateral (peer-pressure) as services are distributed through 5-member groups where each memberrsquos eligibility for loans is based on hisher peerrsquos performance

Examples Grameen Bank (Bangladesh) MuCoBa (Tanzania)

Microfinance Lending Model 4 Cooperatives

Cooperatives are very much like lsquoassociations and Community Banksrsquo except that their ownership structure does not include the poor A group of middle or upper class individuals may form a co-op to offer microfinance services to the poor

Examples Co-operative Bank (England) Cooperative Rural Bank of Bulacan (Phillipines)

Microfinance Lending Model 5 Credit Unions

In a credit union members of a target community gather their money and make loans to one another at low interest rates Compared to community banks credit unions are smaller and non-profit oriented charging interest rates that merely allow sustainability (read 10 determinants of interest rates in microfinance)

Example Unioacuten Progresista Amatitlaneca (Guatemala) Vancity Credit Union (Canada)

Microfinance Lending Model 6 Non-Governmental Organizations (NGOs)

Unlike community-based models NGOs are lsquoexternal organizationsrsquo and their activities range from offering microfinance services (loans insurance savings etc) to improving credit rating of the poor training education and research NGOs may also act as intermediaries between the poor and donor agencies (UN ADB World Bank) and operate locally as well as globally (through a physical or online presence)

Examples ACCION International (headquarters in USA) KIVA (Headquarters in USA) Kashf Foundation (Pakistan)

Microfinance Lending Model 7 For-profit Banks

Commercial Banks as well as specialized Microfinance Banks offer various financial services to the poor but the main purpose may be to secure a high return on investment Unlike other models the aim is social development as well as financial progress beyond institutional sustainability Read about a bank that exploited the poor under the guise of microfinance

Examples Bank Compartamos (Mexico) Khushali Bank (Pakistan)

Microfinance Lending Model 8 ROSCAs Rotating Savings and Credit Associations (ROSCAs)

ROSCAs are small groups typically composed of women where each member makes lsquoregular cyclical contributions into a common fundrsquo which is given entirely to one member at the start of each cycle (weekly monthly quarterly) The benefit of this model is the matching of a clientrsquos cashflows with the loan the ability to structure the deal without interest rates and the absence of over-head costs

Example Say a group of 10 women come together in January and pitch in $7 each making a total of $70 and this sum is given to Member A for the month In February another $70 is

gathered and given to Member B and the cycle continues for 10 months (10 members) No interest is charged and social collateral ensure the money is returned

Credit Lending ModelsMicrofinance institutions are using various Credit Lending Models throughout the world Some of the models are listed below

Associations --------------------------------------------------------------------------------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 or women they can form around politicalreligiouscultural issues can create support structures for microenterprises and other work-based issuesIn 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

Bank Guarantees --------------------------------------------------------------------------------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 donordonation 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 groupBank 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 --------------------------------------------------------------------------------The 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

Cooperatives --------------------------------------------------------------------------------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

Credit Unions --------------------------------------------------------------------------------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 interestThe members are people of some common bond working for the same employer belonging to the same church labor union social fraternity etc or livingworking in the same community A credit unions 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 --------------------------------------------------------------------------------The Grameen model emerged from the poor-focussed grassroots institution Grameen Bank started by Prof Mohammed Yunus in Bangladesh It essentially adopts the following methodologyA 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 familiarise 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

Group --------------------------------------------------------------------------------The Group Models 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 individualsThe collective coming together of individual members is used for a number of purposes educating and awareness building collective bargaining power peer pressure etc

Individual --------------------------------------------------------------------------------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

Intermediatories --------------------------------------------------------------------------------Intermediary model of credit lending position is 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 lendersThe 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 microenterprisemicrocredit programmes and commercial banks (for government financed programmes) Lenders could be government agencies commercial banks international donors etc

Non-Governmental Organizations --------------------------------------------------------------------------------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 --------------------------------------------------------------------------------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 idetified 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

Rotating Savings and Credit Associations --------------------------------------------------------------------------------Rotating Savings and Credit Associations (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 1200 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 (ie borrow from the group) he then pays back the amount in regularfurther monthly contributions Deciding who receives the lump sum is done by consensus by lottery by bidding or other agreed methods

Small Business --------------------------------------------------------------------------------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 lackingPolicies 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 --------------------------------------------------------------------------------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

Microfinance

Credit Lending Models

MicrofinanceCredit Lending Models is an attempt to document the various models currently being used by Microfinance institutions throughout the world Click on the list of models on the left to get a brief description plus variations and examples if applicable

Lending ModelAssociation

This is where the target community forms an association through which various microfinance (and other) activities are intiated Such activities may include savings Associations or groups can be composed of youth women can form around politicalreligiouscultural 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

Lending ModelBank Guarantees

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 donordonation 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

Community Banking model essentially treats the whole community as one unit and establishs 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

Cooperatives

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

Credit Unions

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 livingworking in the same community A credit unions membership is open to all who belong to the group regardless of race religion color or creed


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 familiarise themeselves 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

Group Model

The Group Models 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 Several resources for the group model can be found in the Capacity Building for Microfinance section

Individual

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

Intermediary

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 (ncluding 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 leanders NGOs microenterprisemicrocredit programmes and commercial banks (for government financed programmes) Lenders could be government agencies commercial banks international donors etc

Non-Governmental Organizations

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 comunities and microcredit organizations to monitor progress and identify good practicecs They have also created opportunities to learn about the principles and practice of microcredit This includes publications workshops and seminars and training programes

Peer Pressure

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 idetified nurchured 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

ROSCAs

Rotating Savings and Credit Associations (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 1200 collected each month is given to one member Thus a member will lend money to other members through his regular monthly


Small Businesses

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 dinominator 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

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

Microfinance serves as an umbrella term that describes the provision of banking services by poverty-focused financialinstitutions (microfinance institutions ndash MFIs) to poor parts of the population that are not being served by mainstream financial services providers The core service of microfinance is the provision of microcredit Typically these are small loans to the working poor The borrowers are small entrepreneurs that include street vendors traders service providers small farmersfishermen herders Initially microfinance focused only on rural areas but increasingly the urban poor are also becoming a focus group for such services As the practice has matured and reached a larger number of people several other financial services such as microdepositsand microinsurance are also being offered to the clientele

Models of Microfinance LendingIn contrast to commercial banks micro-lending institutionsusually refrain from taking collateral Instead they follow a model called the Self Help Group Model or Group Lending Model In this model an MFI lends a small loan to an individual who belongs to a group of 5 to 20 people As soon as the individual borrower proves reliable credit is extended to additional people within the group This procedure creates an incentive for the group to monitor each otherrsquos behavior and to ensure borrower discipline as the group is jointly liable for the failure of any single member to repay her microloan

mong other benefits self-help groups help the cause of women empowerment as other microfinance tools do The fact that most self-help groups are composed of women in itself is important because it shows women in developing countries are taking financial matters into their own hands and are attempting to improve their livelihoods via increased access []

Benefits of Self-Help Groups in MicrofinancePosted by Fehmeen on January 10th 2011 | No Comments

Self-help Groups have been around for several years and it is only now that their true potential is being realized by players in the microfinance sector There have been several attempts to formalize the sector in order to overcome some challenges and also to maximize the social impact of these credit and saving groups as []

What is a Self Help GroupPosted by Fehmeen on January 4th 2011 | No Comments

Self Help Groups composed of a group of people from urban and rural areas who come together to save and lend money to group members are a popular microfinance model in India as well as other countries around the world In fact these savings and credit groups have been around for decades and in some []


Microfinance itself is a credit lending model and within this lending model exist several subcategories ie microfinance lending models which differ in terms of where their funds are sourced from and how the money is governed This post briefly mentions each lending model (explained in detail at GDRCrsquos website) and lists microfinance providers that follow []

Grameen Credit

1048707 Promotes credit as a human right

1048707 It is targeted to the poor particularly poor women

1048707 No collateral or legally enforceable contracts It is based on

trust not on legal procedures and system

1048707 Promotes income generation not consumption

1048707 Created in oppostion to traditional banking practice

1048707 People should not go to the bank bank should go to the

people

1048707 Group-lending based approach

1048707 It comes with both obligatory and voluntary savings programs

for the borrowers

1048707 Sustainability of business model is key

1048707 Grameencredit gives high priority on building social capital

8 Microfinance Lending Models (Types of MFIs)









Benefits of Self-Help Groups in Microfinance

What is a Self Help Group


Cooperatives are very much like lsquoassociations and Community Banksrsquo except that their ownership structure does not include the poor A group of middle or upper class individuals may form a co-op to offer microfinance services to the poor

Examples Co-operative Bank (England) Cooperative Rural Bank of Bulacan (Phillipines)


In a credit union members of a target community gather their money and make loans to one another at low interest rates Compared to community banks credit unions are smaller and non-profit oriented charging interest rates that merely allow sustainability (read 10 determinants of interest rates in microfinance)

Example Unioacuten Progresista Amatitlaneca (Guatemala) Vancity Credit Union (Canada)


Unlike community-based models NGOs are lsquoexternal organizationsrsquo and their activities range from offering microfinance services (loans insurance savings etc) to improving credit rating of the poor training education and research NGOs may also act as intermediaries between the poor and donor agencies (UN ADB World Bank) and operate locally as well as globally (through a physical or online presence)

Examples ACCION International (headquarters in USA) KIVA (Headquarters in USA) Kashf Foundation (Pakistan)


Commercial Banks as well as specialized Microfinance Banks offer various financial services to the poor but the main purpose may be to secure a high return on investment Unlike other models the aim is social development as well as financial progress beyond institutional sustainability Read about a bank that exploited the poor under the guise of microfinance

Examples Bank Compartamos (Mexico) Khushali Bank (Pakistan)


ROSCAs are small groups typically composed of women where each member makes lsquoregular cyclical contributions into a common fundrsquo which is given entirely to one member at the start of each cycle (weekly monthly quarterly) The benefit of this model is the matching of a clientrsquos cashflows with the loan the ability to structure the deal without interest rates and the absence of over-head costs

Example Say a group of 10 women come together in January and pitch in $7 each making a total of $70 and this sum is given to Member A for the month In February another $70 is






















Microfinance









Community Banking


Cooperatives


Credit Unions




Grameen model



Group Model




Individual


Intermediary






Peer Pressure


ROSCAs



Small Businesses




Village Banking











Grameen Credit








people



for the borrowers




































Microfinance









Community Banking


Cooperatives


Credit Unions




Grameen model



Group Model




Individual


Intermediary






Peer Pressure


ROSCAs



Small Businesses




Village Banking











Grameen Credit








people



for the borrowers



















Community Banking


Cooperatives


Credit Unions




Grameen model



Group Model




Individual


Intermediary






Peer Pressure


ROSCAs



Small Businesses




Village Banking











Grameen Credit








people



for the borrowers
















Grameen model



Group Model




Individual


Intermediary






Peer Pressure


ROSCAs



Small Businesses




Village Banking











Grameen Credit








people



for the borrowers















Intermediary






Peer Pressure


ROSCAs



Small Businesses




Village Banking











Grameen Credit








people



for the borrowers
















Small Businesses




Village Banking











Grameen Credit








people



for the borrowers























Grameen Credit








people



for the borrowers















8 microfinance lending models

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