Microfinance....a model of changing society!!!!!!

"One of the most distressing consequences of globalization is the increase in the wealth of a few while hundreds of millions of people still live in poverty. However, microfinance is a powerful tool to begin to change that."
-- Marilou van Golstein Brouwers

Which is the key that will end extreme poverty to enable the poorest of the poor to get their foot on the ladder of development? Microfinance is the key, catering the needs of bottom of pyramid. They provide financial services which usually involve small amounts of money - small loans, small savings, etc. "Microfinance" helps to differentiate these services from those which formal banks provide

How Microfinance emerged? Let’s go back in 1970, when some organization started to engage actively in giving microloans to some people. The pioneering of microfinance is Dr. Mohammad Yunus, who began experimenting with lending to poor women in the village of Jobra, Bangladesh during his tenure as a professor of economics at Chittagong University in the 1970s. He launched an action research project. This was to examine the possibility of designing a credit delivery system providing banking services targeted at the rural poor. The Grameen Bank Project (Grameen means "rural" or "village" in Bangla language) came into operation. Later on this bank was came into action as Grameen Bank

Now let us understand how microfinance institutes (MFI) works i.e. their lending models. Following are its models used by MFI throughout the world (explained in detail at GDRC’s website):

1) Association

2) Bank Guarantees

3) Community banking/ Grameen Bank/ Village Banking

4) Co-operatives

5) Credit unions

6) Group

7) Individuals

8) Intermediateries

9) NGO’s

10) Peer Pressure

11) Small business

However, MFI uses two basic types of model in India:

SHG (Self Helping Groups) &

Grameen/ Joint Liability Groups (JLG)

First talking about SHG model- it’s an association formed by up to 20 members (not exceeding 20 members).Here loan taken by group is liability of entire group. Even if one member of group gets into defaulters list entire group is deemed to be defaulter.

Some Features:

-          Group can be formed as all-men group, all-women group or mixed group(women group is preferred)

-          Usually assist by NGO’s in initial period to prepare people for entire process of MFI

-          Often SGH are found involved in many social activities in addition to financial transactions i.e. taking up of social issues like dowry, girl child killing, alcoholism

-          Proper organizational structure i.e. Group President, Secretary, Treasurer

-          They maintain their own books of accounts like daily transactions, saving, loans repayment, expenditure, etc.

Second is Grameen model / Joint Liability Groups which is most widely used and accepted credit delivery model in world today. Influenced by Dr. Mohammad Yunus ‘s Grameen bank credit delivery system.

Some features of Grameen Bank model:

-          Bank branch is set up with branch manager and a centre managers covering about 15-22 villages

-          They identify prospective clientele and explain them functioning, purpose & mode of operation.

-          Primary group of 5 prospective members are made and 5-8 such group (can vary) together form Centre. Initially only one or two from group are eligible for providing loan

-          This group is observed for a month for their discipline of abiding to bank rules

-          If first eligible borrowers begin repay principle plus interest over period of 6 weeks other members of group automatically becomes eligible for a loan. This pressurizes individual member from group to repay loans on time

-          MFI interacts directly with these groups in form of regular meetings, focused on financial transactions.

-          Flat interest rate is charged and instalment size of repayment is small for weeks. This reduces the burden of loan repayment on individual

-          The interest rate on all loans is 16 percent. The repayment rate on loans is currently - 95 per cent

-          This model is more strict in its rules, policies and systematically planned

Distinguishing feature of this model from SHG model is that, SHG model is developed as holistic development of society a financial transaction is a part of it, while JLG is focused more on providing financial services to poor people.

Other features of JLG:

In urban India Grameen model is typically called as Joint Leading Group, where group is formed and these group come together to borrow loan from MFI. There is one Group leader in JLG and all group members share the responsibility of repayment of loan. Here the groups are formed by people of homogeneous community or locality.

Reference:

http://www.grameen.com/

http://microfinanceafrica.net/tag/group-lending/

Dishti Naik

GLC RMM 10-12