Credit Lending Models

Microfinance institutions are using various Credit Lending Models throughout the world. There
are two broad types of lending:-

a) Individual lending:
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.

b) Group Lending:
The Group lending 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. Group lending
models used include:

Grameen model :
The Grameen model emerged from the poor-focused grassroots institution, Grameen Bank which
was 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 environment 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.

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 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.
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 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 lend 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 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 belief. 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.

Intermediaries:
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 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.

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.

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. 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 credit:

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 focused 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.

The MC2 Model:

MC2 are rural development micro-banks created and managed by a community in keeping to
their local values and customs. The principal promoter of this concept, Dr. Paul K. Fokam drew
inspiration from Einstein’s famous formula: Victory over Poverty (VP) is possible if the Means
(M) and the Competences (C) of the Community (C) are combined. Hence the formula VP= M x
C x C =MC2. In other words, MC2 is a community based micro banking approach whereby
people and mostly the underprivileged endeavor to be self-reliant, create wealth with a view to
improving their living conditions in a sustainable manner.

The model has two versions: a rural version, MC2 and an urban version dubbed MUFFA. The
second version of the model is exclusively for women because studies and personal research of
the founder show that women in urban areas are those most hit by poverty. Through MUFFA,
these women have easy access to financial services which help them to start job creation and
wealth generating small business activities. Consequently, the model is built and supported by
four main pillars. These are the local populations, the nongovernmental organization (NGO)
Appropriate Development for Africa (ADAF), AfrilandFirst bank Group and some national and
foreign partners.

Self Help Groups (SHGs) model:

It is the Grameen replication model of Bangladesh. A self-help group (SHG) is a village-based
financial intermediary committee usually composed of 10–20 local women or men. A mixed
group is generally not preferred. Most self-help groups are located in India, though SHGs can be
found in other countries, especially in South Asia and Southeast Asia. SHG is nothing but a
group of people who are on daily wages, they form a group and from that group one person
collects the money and gives the money to the person who is in need

Members also make small regular savings contributions over a few months until there is enough
money in the group to begin lending. Funds may then be lent back to the members or to others in
the village for any purpose. In India, many SHGs are 'linked' to banks for the delivery of micro-
credit.
A SHG may be registered or unregistered. It typically comprises a group of micro entrepreneurs
having homogeneous social and economic backgrounds, all voluntarily coming together to save
regular small sums of money, mutually agreeing to contribute to a common fund and to meet
their emergency needs on the basis of mutual help. They pool their resources to become
financially stable, taking loans from the money collected by that group and by making everybody
in that group self-employed. The group members use collective wisdom and peer pressure to
ensure proper end-use of credit and timely repayment. This system eliminates the need for
collateral and is closely related to that of solidarity lending.