The poverty approach in microfinance

Existing poverty approaches includes:

• Loans to individuals.

• Mutual Loans Grameen Bank.

• Mutual group lending in Latin America.

• Bank self-governance villages

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2.2.1 Loans to individuals a. Methods:

Clients are individuals working in the informal sectors where venture capital and credit for purchasing of fixed assets. The credit officers often work with a relatively small group of customers and develop close relationships with them for many years, often providing the minimum technical support and analysis the credit demand of these groups. Loans and loan procedures are based on the careful analysis of the credit officers. Lending rates are usually higher for the formal sector and lower than the informal sector. Most MFIs require collateral or other forms of guarantees. Compulsory savings are usually not required.

Analysis and detailed financial projections usually included in the loan application. The number and duration of negotiations with customers and staff credit monitoring and other credit staff. The relevant documents include loan contract; Detailed information for each customer; if possible, an application signed by the petitioner and the information on this; vouchers for collateral and credit history. Loan officers are often recruited from the community so their analysis can be based on the level of understanding about healthy customer credit (loans based on personal characteristics).

Customer must complete the relevant documentation, including the information required by the customer and in case there should be an organization or individual guarantees of the significance of this information; legal documents of the property mortgage and credit history of the individual. The organization's employees are often recruited from the community, so they have to analyze the safety of credit to customers. The contract was signed and the loan disbursement procedure is done at a branch or office of the organization's service delivery

Loans are usually disbursed at the branch office. The visit to the base of business customers are also conducted regularly to determine whether the customer has done the right procurement contracts or loans. These payments are made periodically at each branch...

b. Product

Loan size can vary from $ 100 to $ 500 for the period from 6 months to 5 years.

Savings services can be provided or not depending on the organizational structure of MFIs. Training and technical assistance can be provided by the credit officer;

sometimes training is provided on the basis of charge or mandatory.

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c. Client

Is the urban enterprise or small farms, including women and men, and may be the basis of a small business and middle-income, small businesses and enterprises production.

2.2.2. Mutual Loans Grameen Bank

In Asia, Dr. Mohammed Yunus (1976) in Bangladesh adopted a model of credit loan group for those who have no land. This model later evolved into Grameen Bank (1983). The key focus of the Bank is social development by providing credit to the poverty without requiring collateral or legal contract. So their customers are really poor, landless and without possessions, especially women.

Grameen Bank provides credit services to the poor based on the principle that the bank will choose the customers by directly met them, not let customers come to see the bank.

This model is used to serve for the rural women, landless that need fund for income creating activities. This model is common in Asia velvet which is applied in many countries around the world. Grameen Trust Board on 40 similar models in Asia (in Vietnam, CEF fund from Vietnam Women's Union), Africa and Latin America.

a. Methods

• Grameen Credit is based on the assumption that the poor have skills that are unused or underutilized. Certainly it is not the fact that the poor become poor because of the lack of skills; poverty is not created by the poor but by the institutions, living conditions and policies surrounding them. To eliminate poverty, all of things we need to do is carry out the appropriate changes in institutions and policies. Grameen believes that charity will not eliminate poverty; moreover, it makes the poverty continues, creating dependency and lost the initiative, and creativity of individuals in fighting poverty. The main principles of Grameen Credit - Bangladesh include:

• A loan without collateral and legal covenants, which based on trust.

• Loans to groups of at least 5 persons jointly liable, the group borrowers don’t apply for loans at the banks. By contrast, bank will meet the group to choose borrowers, through local meetings between the bank and group lending centers.

For the first time, the Bank choose only 2 people in the group to lend, then

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$

(3)

(1) (4) (5)

New Loans (2)

based on the best repayment record, banks will continue lending but every time two people only. Current debt level reaches 98%.

• Operational objectives and the loan amount are determined by the recommendations of team leader for the debt borrowing. Loans granted within 15 days from the date of submission for the loan application, the procedure are very simple. The borrowers can apply for one or many purposes.

• The principle and interest rate are fixed for each period (per week, or 2 weeks), with 18% interest rate. When the loan was repayment 50 periods, or nearly a year, they start paying interest.

• Borrower forced or voluntarily participates in a savings program.

• Loans can penetrate non-profit organizations. If through profit organization, the interest rate in the market is usually higher for loans.

• Grameen Credit prioritizes the establishment of social capital, to establish training centers to develop the technical qualifications of the borrower and the lender, paying special attention to the education children, scholarships for high school credit for new technologies such as mobile phones, computer science, natural energy, replacing human labor…

• The creative highlight of this model is "self-managed groups" that connect borrowers with similar circumstances to join the responsibilities, screening, monitoring and managing each other, reducing asymmetric information in credit activities. Each group consists of 5 people, the first loan is for 2 people, and then followed by the 3rd, 4th and last. Weekly staff will meet about 40 people (about 7-8 group), employee credit officer is as a bridge between the group and member, and to share business experience, and / or management expenses. Especially, when one member of the group does not have the ability to repay the debt, the bank will reject all the loans of the remaining members in the group. Therefore, borrowers are forced to pay business debts, and many people may feel embarrassed if they do not repay the debt (so that the repayment rate at the microfinancial institutions are usually very high).

Figure 2.2.2 Diagram under the group lending model of the Grameen Bank

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• Step 01: The poor will choose 4 or 5 people in the same situation for a team;

participants must not have negative credit history.

• Step 02: The group will participate in a 5 day course on financial literacy, business management and savings.

• Step 03: Receive credits.

• Step 04: Attend weekly group meetings and periodic loan payments and savings banks and conventional groups.

• Step 05: Complete repayment and the Bank may consider continuing the poor borrowers.

b. Product

The loans usually have a term of 6 months to 1 year and the repayment is usually done weekly. The loan amount usually ranges from $ 100 to $ 300 with the interest of about 20% / year. Saving is absolutely imperative.

c. Client

Guest comes from rural and urban areas and usually (but not only) women with low-income are seeking income creating activities.

2.2.3. Mutual group lending in Latin America.

The model teams also often lend each member of the group of about 4 to 7 members.

The members must guarantee to each other for the loans to replace the traditional collateral. Customers are often selling in the small markets, who often borrow small items, short-term capital as the working capital. This model was developed by ACCION International organizations in Latin America and has been adopted by many microfinance institutions (Joanna Ledgerwood, 2006).

a. Method

Customers tend to be small businesses under the informal sectors, such as traders or business people need a small amount of capital. The team member work together to ensure loan repayment, and access to the next loan repayment depends on the success of all team members.

The payments have been done entirely at the head office of the program. The model also provides technical minimum for borrowers, such training and

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institution building. Loan officers often work from 200 to 400 customers and understand the customer. The approval for the loan by loan officers often decides on the basis of the economic analysis with a minimum capital requirement. The disbursement of the loan was made to the head of the branch team; this person will distribute this amount to each member of the group. Loan officers will carry out occasional visits to each individual customer. The group members usually receive the loan amount equally at the first. The amount and duration for the loan are increased when customers show their effectiveness in business.

Applications for loans are usually simple and quick review. The savings often, but sometimes require the deductible at the time of loan disbursement. It is not necessarily require customers to save before getting the loan. Savings basically serves as an offset, secured part of the loan amount.

b. Products

The original loan amount usually ranges from $ 100 to $ 200. The next loan will be no limit above. Interest rates are often quite high and the service charge is also usually included. The savings are also considered as part of the loan; a few organizations encourage the establishment of emergency funds within the group as a means of ensuring safety. There are very few voluntary savings products offered.

c. Client

Most urban areas that including women and men people with small and middle income (small business, merchant or trader).

2.2.4. Bank self-governance villages (Savings and loans association)

Bank of village self-governance is established and managed by village councils in rural areas. The other banks and the village bank will serve the needs of the whole village, they were not only served a group of 30-50 people.

a. Methods

The program will clarify the villages having high social relationship. Both men and women in the village will determine the organizational structure and operating principle of the village. They will vote for a management committee and credit committee with 2 or 3 people. The self-managed village banks to mobilize savings and short-term loans to villagers on an individual basis. The program does not

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provide funding for banks credit villages. Bank relies on the ability of its savings.

After one or two years, the village bank has built a system or informal associations so that they can discuss real issues and try to resolve the difficulties.

The association acts as an intermediary system and transfer credit with a local bank, usually an agricultural development bank. This system is connected to the village bank with the formal financial sector. Due process management is highly centralized, critical services are limited by the audit and internal audit, training and clear manner clearly shown. These services are paid by the village bank for ensuring the financial sustainability of the model.

b. Products

This product can include savings, current accounts and term deposits.

There is no direct link between the loan amount and the ability of member savings. Interest rates are set by each village depending on its experience with the traditional savings and loan combination.

The farther of the area, the more interest rates tend to increase, because the opportunity cost of the loan is higher. The loan is repaid once.

The loan for individual is usually go with the collateral, but above all, trust remains of villages and social pressures to ensure a high refund rate. All original management, managers and members are trained regularly. Some programs also provide technical support for the new business activities

The typical example: Villageoises Caisses d'Epargne et de Credit Autogerees in Mali (Pays Dogon), The Gambia (savings and credit associations or Visaca village in São Tome and Cameron.

c. Clients

Targeted customers are primarily in rural areas including people who having low incomes or little on saving.

2.2.5 Conclusions

The basic ways to distinguish this approach with other approaches is the choice of products and services which are provided and how is the supply of such products.

Any approach must also be based on the target market and the needs of the target customers with the services of financial intermediation. These factors depend on the

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national context, objectives and structure of MFIs. These approaches are not separated. But hardly a single model is appropriate for every organization and so all models must be tailored to local conditions to suit the actual needs. This requires MFIs to be flexible and dynamic in finding a way to reach your target market in accordance with its terms.

Except method requires individual loan officers to approach each credit borrower and implement monitoring activities using capital and collateral requirements to limit the problems of any information symmetry. The remaining methods are based on the invention as a contract "group lending" and the new perspective on subsidies is seen as a key factor for success and recognition in the world of this method world. The basic problem of group lending contracts actually makes those neighbors become borrowers signed loans, mitigate problems caused due to information asymmetries between the borrower and the lender. The neighbors now have an incentive to monitor each other and eliminate the risk out of lending contracts, promote repay the loan even if there are no collateral requirements.

Group lending is the most satisfactory method because of its ability to disseminate widely and proven effective through the Grameen Bank model in Bangladesh. It is the recognized worldwide and has been implemented in Vietnam through the Fund, the Women's Union of Vietnam. It is recognized as financial institutions first small scale in Vietnam. Due approach poverty of BSP may form organizations Savings and loans (SCG) has many characteristics of the platform based on the model for group lending. The subject focuses on the formula based on group lending mechanisms and screening facility to ensure the refund rate of the method is guaranteed this loan.