Introduction to Micro finance - the Lending Methodology

Ms: Heba Hassan +249906850429

• Microfinance provides a wide range of financial services to low-income clients, including self-employed and low earning individuals who are working in informal sectors.

• The core objective of microfinance is to create a favorable environment for the low income self employed and near-poor households in which they have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and general banking services.

• Microfinance provides a comprehensive range of financial services to the "unbanked people" working in informal sectors which best fits their needs and affordability.

Key points:

• Unbanked:The segment of the society who is economically active and particularly consists of poor or low income earning people and does not have an access to commercial banking services.

• Informal Sector

• The sector of the society which comprises of typically low income individuals and self employed persons running unorganized businesses.

• • These businesses do not maintain financial statements.

• • Usually not tax payers.

• • Do not have access to commercial banking services.

• Range of Financial Services : These financial services comprise of various loan products, saving products, insurance and general banking facilities.

• Needs and affordability: It is important to design services and products that suit the requirement of the target market. For this purpose assessment of the client's need and his / her financial worth should be carried out in such a manner that paying back does not become a burden.

Challenges faced by poor people:

• Does not have access to commercial banking services because of the following facts

• • Commercial banks do not entertain clients with little amount of cash.

• • Commercial banks do not offer specialized products.

• • Transactional and service cost is unaffordable.

• • Unavailability of financial statements

• • Unable to provide collateral security.

Fallacy about poor people:

• Poor people do not save.

• • Poor people are reluctant to go to a formal financial institution.

• • Poor people are not an unacceptable credit risk.

• • Poor people do not plan for future.

Characteristics of Informal Sector:

• Do not maintain financial statements.

• • Usually not tax payers.

• • Do not have access to commercial banking services.

• • Borrow money from informal money lenders (friends, relatives, money lenders)

• • Save money in informal ways (domestic money keeping, purchase cattle, Beecees / Committees)

Need Analysis:

• Lifecycle Needs : such as weddings, childbirth, education, homebuilding, widowhood, old age.

• Personal Emergencies : such as sickness, injury, unemployment, theft, harassment or death.

• Disasters : such as fires, floods, and man-made events like war or bulldozing of dwellings.

• Productive Purpose : expanding a business, buying land or equipment, improving housing, securing a job (which often requires paying a large bribe), etc.

Microfinance Products

• Loans

• • Savings

• • Insurance

• • Guarantees

• • Money Transfer

Microfinance Lending Products:

• Microfinance lending products mainly includes

• Group Lending :

• Solidarity Group Lending

• • Group of Groups (Grameen Model)

• Individual lending:

• Individual / Business Loan

• Housing Loan

Group Lending:

• • Provide credit services to formerly "unbankable"clients in the same community, same profession or locality.

• • Work around the absence of collateral by creating "peer pressure" through joint liability for loan repayments.

• • Establishment of credit to the very poor on a minute scale.

Solidarity Group Lending:

• Borrowers form groups, usually of three to seven members to avail a loan.

• • MFI issues one loan to the group and holds the group and each of its members liable jointly and or separately for the repayment of loan.

• • Groups go through several cycles, with loan amounts increasing, in principle, during each cycle

Group of Groups Lending: (GrameenModel)

• Borrowers form group, usually of five members.

• • A number of these groups (minimum of five) come together to create a Center.

• • Center and group members screen and qualify loan applicants.

• • MFI issues several loans to group members and holds the group and each of its members liable jointly and/or separately for the loan.

Individual Lending:• • MFI lends to one borrower on individual

basis.

• • Loan does not have "protective layer" of group to mitigate credit risk.

• • Precise assessment of the client's credit worthiness and need is required to allow a risk free loan.

Lending Methodology

• Eligibility Criteria:

• The key points to be considered are

• • Age of Business

• • Age of Client

• • Location of Business

• • Business Registration

• • Loan Purpose

• • Back ground check

• Assessment of Credit Worthiness:

• • Credit worthiness is the value of the borrower to avail a microfinance loan.

• • It is a composite of gross income of the prospect, less its business and personal expenses, rational of his capacity to repay the loan.

• • Loan size must be determined specifically to fit the client's need.

• • Estimate capacity to repay.

• • Accurate assessment of the prospect is the key to a successful relation with the MFI.

Relationship Building and Loan Follow up:• A Loan officer is assigned to a particular client who is

responsible for the account maintenance i.e sales and collection of repayments.

• • Search of further references.

• • Maintain client contacts even clients in good standing or when delinquent.

• • Provide incentive for regular repayment (extended credit, access to preferred services, other incentives)

• • Quick response in case of non-payment. Start by friendly reminders by loan officer and then tighten up collection efforts.