DR. RAHMATULLAH outlines the various microfinance models working to fight against poverty.
There is considerable publicity these days about microfinance or micro-credit as a tool against poverty. This tool has widely been adopted in European, American, African, and Asian countries with a considerable degree of success. The Government of India too is giving a lot of importance to this scheme for eradicating poverty. Typically, the characteristic features of microfinance programmes are that:
- Loans are usually relatively short term, less than 12 months in most instances, and generally for working capital with immediate regular weekly or monthly repayments they are also disbursed quickly after approval, particularly for those seeking repeat loans.
- The traditional lender’s requirements for physical collateral such as property are usually replaced by a system of joint liability whose members are collectively responsible for ensuring the return/repayment of their individual loans.
- Loan application and disbursement procedures are designed to be helpful to low income borrowers – they are simple to understand, locally provided and quickly accessible.
- Interests charged on these loans vary from 12 % to 30% p.a.
The summary of various operative microfinance models are as follows:
Grameen Bank Model Bangladesh: This model basically provides finance for entrepreneurial women already doing small jobs. The model requires careful targeting of the poor through means tests comprising mostly of women groups. The model requires intensive fieldwork by staff to motivate and supervise the borrower groups. Groups normally consist of five members, who guarantee each other’s loans.
A number of variants of the model exist; but the key feature of the model is group-based and graduated financing that substitute collateral as a tool to mitigate default and delinquency risk.
The second model may be called Village Bank Model. This model involves an implementing agency that establishes individual village banks with about 30 to 50 members and provides “external” capital for onward financing to individual members. Individual loans are repaid at weekly intervals over four months, at which time the village bank returns the principal with interest/ profits to the implementing agency.
A bank repaying in full is eligible for subsequent loans, with loan sizes linked to the performance of village bank members in accumulating savings. Peer pressure operates to maintain full repayment, thus assuring further injections of capital, and also encourages savings. Savings accumulated in a village bank is also used for financing.
As a village bank accumulates sufficient capital internally, it graduates to become an autonomous and self-sustaining institution (typically over a three-year time period). This model has been very successfully implemented in a Shari’ah-compliant manner in Jabal al-Hoss, Syria. A new experiment by FINCA in Afghanistan also seeks to implement this model.
The third type of MF model is a Credit Union which is based on the concept of mutuality. It is in the nature of non-profit financial cooperative owned and controlled by its members. Credit Union mobilises savings, provides loans for productive and provident purposes and have memberships which are generally based on some common bond. Credit Union generally relates to an apex body that promotes primary credit unions and provides training while monitoring their financial performance. Credit Union is quite popular in Asia, notably in Sri Lanka,
A fourth model originating in India is based on Self-Help Groups (SHGs). Each SHG is formed with about 10-15 members who are relatively homogeneous in terms of income. An SHG essentially pools together its members’ savings and uses it for lending. SHGs also seek external funding to supplement internal resources. The terms and conditions of loans differ among SHGs, depending on the democratic decisions of members.
Typical SHGs are promoted and supported by NGOs, but the objective (as with village banks) is for them to become self-sustaining institutions. Some NGOs act as financial intermediaries for SHGs, while others act solely as ‘social’ intermediaries seeking to facilitate linkages of SHGs with either licensed financial institutions or other funding agencies.
The SHG model is a good platform for combining microfinance with other developmental activities. India has adopted Self Help Group model of microfinance. In India, three types of SHG models have emerged:
1. Bank-SHG Members: The bank itself acts as a self-help group promoting institution (SHPI).
2. Bank-Facilitating Agency-SHG Members: Facilitating agencies like NGOs, government agencies, or other community-based organisations form groups.
3. Bank-NGO-MFI-SHG Members: NGOs act both as facilitators and microfinance intermediaries. First they promote groups, nurture them, and train them, and then they approach banks for bulk loans for lending to the SHGs.