Microfinance-Credit Lending Models
Microfinance institutions are the oldest financial institutions in the world, but with time they have adapted to the changes, and have started using various credit lending models. The Microfinance community has divided itself into hierarchies. Some of the popular Microfinance credit lending models adopted across the world are:
Associations: In this context, a target community forges together to form an association through which a variety of microfinance activities are initiated. The microfinance activities may also include savings. The associations may comprise of youth, women, or be formed around cultural, religious, or political issues.
In some of the countries a legal body can also form an association. These legal associations have certain advantages, like collection of insurance, fees, tax breaks, and provide other protective measures.
Bank Guarantees: As the name implies, a bank guarantee is utilized when a loan from a commercial bank is needed. The guarantee can be set up externally through a donor/donation or a government agency, etc. or internally through using member savings. Bank guarantee loans can be extended to both individuals and a self-formed group. These loan funds may be used for insurance claims and loan recovery.
Community banking: This financing model considers the whole community as one unit and facilitates the establishment of semi-formal and formal institutes through which microfinance are administered. Usually NGOs and other similar organizations take it upon themselves to form such institutions, and also educate the community members in diverse financial activities.
Co-operatives: A co-operative is an independent association of people who come together voluntarily to meet their mutual economic, social and cultural aspirations and needs through a egalitarian controlled enterprise. Sometimes the cooperatives also include savings activities and member-financing as well.
Credit Unions: A credit union is a member-driven unique self-help financial institute comprising of members of a specific group like labor unions or a social fraternity who assent to save money and make loans to each other out of that fund at reasonable interest rates. A credit union membership is free to all, and it follows a democratic approach in electing the director as well as the committee representatives.
Grameen: The grameen model entails that a bank unit be composed with a field manager and a set of bank staff covering a specified area, like 15 to 20 villages.
The banking service starts by the manager and staff familiarizing themselves with the native people and explaining to them the intent, functions motives, and mode of operation. Finally, groups comprising of five future borrowers are formed, out of which only two people get the loan, and if within fifty weeks they return the principal plus interest, as per the banking rules, the others become eligible as well. This is done, so that there is a collective liability on the group, which serves as guarantee against the loan.
Group: This model is based on overcoming individual shortcomings by the aggregated accountability and security engendered by the formation of a group of these individuals. This collective approach also helps in educating and building awareness, collective negotiation powers, peer pressure etc.
Individual: This is the simplest and the oldest credit lending model where small loans are given straight to the borrower. In most cases such loans are accompanied by socio-economic services like education and skill development.
Intermediaries: As the name suggests this model is a ‘go-between’ organization operating between the lender and borrower. They play a critical role of creating credit cognizance like starting savings programs and thus raising the credibility of the borrowers to a sufficient level. These intermediaries can be NGOs, individuals, commercial banks etc.
Non-Governmental Organizations: NGOs are very active in the field of micro-credit, be it creating consciousness of the importance of micro-credit, or developing tools and resources to monitor and identify righteous practices. The NGOs have also created many opportunities to help people learn all about micro-credit practices and principles through organizing workshops, seminars, training programs etc.
Peer Pressure: This model uses moral obligation to create a link between borrowers and other project nominees to ensure participation and repayment in micro-credit programs.
Rotating Savings and Credit Associations: In this model a group of people join together and make periodic cyclical contributions to a common fund that is given to a member in a lump sum. After receiving the amount the member starts paying back by making regular contributions. Bidding or lottery makes the decision about whom the money should go to.
Small Business Enterprises (SME): They get loans from micro-credit programs for creating employment, increasing income etc. The micro credit is either provided directly to the SME or as a part of a bigger SME development program.
Village Banking: This is community based banking wherein 25-50 low income individuals who seek self-employment come together to collect funds and give loans. The initial capital may arrive from outside, but the members follow a democratic approach in operation and moral collateral for repayment.
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