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FAQs

1. What is Micro-Credit?


2. What is a MFI?


3. Who are the clients of microfinance?


4. How does microfinance help the poor?


5. Aren't the poor too poor to save?


6. Why do MFIs charge such high interest rates to poor people?


more FAQs...

Events

July-Oct 2009 - Microfinance Training of Trainers Course
»An online training program for people interested in microfinance. Course materials are in English and in Thai.


21-25 September 2009 - Second ECHO Agricultural Conference (Chiang Mai)


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27 November, 2008

 

A Comparison of Village Banking and Solidarity Lending


by Tamsin Harriman

Two of the most popular micro-finance methodologies are solidarity lending and Village Banking. Solidarity lending is also sometimes referred to as the Grameen methodology, after Grameen Bank, who pioneered the method in the 1970s. The Microfinance Information Exchange (MIX) surveyed 890 active Micro-finance Institutions (MFIs) in 2007. Of those, 519 engaged in solidarity lending (either alone or in combination with individual lending), and 90 engaged in Village Banking. In Thailand, some MFIs using solidarity and individual lending are BAAC, the Government Savings Bank, and Step Ahead MED. Thai MFIs using the Village Banking method are SED and the Common Interest Foundation. The two methods have many similarities, but also some key differences.

In the solidarity lending method, borrowers each belong to a solidarity group, usually consisting of five to eight people. Groups select their own members, but none of them can borrow until they have formed a complete group. The solidarity groups, in turn, are arranged into larger groups (often called centers), typically consisting of five to eight groups. These centers meet regularly - weekly is most common. At center meetings, a representative of the micro-finance institution (MFI) collects repayments, makes loan disbursements, does the accounting, and decides who should and should not receive another loan. Many solidarity lending MFIs focus on credit alone, but some, including Grameen, also provide savings accounts, and occasionally other services such as micro-insurance. In those cases, the MFI administers the savings accounts, etc, and members can make deposits and withdrawals at center meetings.

The purpose of the groups is to utilize social dynamics and peer pressure to avoid the need for collateral. Each member of the group must guarantee the group's other members, and many MFIs have a policy that the group must repay the total amount it owes at each scheduled repayment, even if one or more members is unable to pay (hence the term, solidarity lending). This ensures that each borrower will encourage and assist her fellow group members to repay their loans, since no one wants to pay extra because another can't pay. In addition, borrowers are more likely to repay even without encouragement, since none want to lose face by not paying and having the other borrowers pay for her. In this way, the MFI is ensured of always getting its money back, and thus can make loans without the need for collateral, which the poor cannot provide.

The biggest difference between solidarity lending and Village Banking is that an MFI using the latter method sets up independent Village Banks rather than loaning to individual members itself. The Village Banking methodology also heavily emphasizes savings. At its formation, a Village Bank pools together any savings that its members may already have, and mobilizes those savings to make loans to its members. In many cases, the villagers do not have enough savings to make this possible at first, and so the MFI provides a loan to the Village Bank - not to its members individually. The Village Bank then lends out that money to its members at a slightly higher interest rate. Each member also has a savings account with the Village Bank. The Village Banks are member-owned, so they distribute a proportion of any profit they make from loan interest back to the members, based on how much savings they have and how long they have been saving.

With its use of standard microfinance practices, and the fact that it is member-owned, a Village Bank is like a hybrid of a one-village MFI and a credit cooperative. The MFI's role in Village Banking is to provide training, support, and initial loans (if necessary). The Village Bank selects a president, vice-president, accoutant, and secretary. The MFI then trains them how to operate a Village Bank - usually they teach the solidarity lending method - and how to maintain accounting records. Once training is complete, the MFI only interacts with each Village Bank once per month, to collect repayments on any loans the MFI made to the bank, to provide assistance with accounting, and occasionally to solve problems that the Village Bank cannot solve itself. The ultimate goal of Village Banking is that eventually each Village Bank will become independently profitable and self-sustaining, at which point the MFI will no longer be involved in its operation.

Both solidarity lending and Village Banking have their advantages and drawbacks. As we have discussed here before, an advantage of non-Village Banking methods is that the MFI can make sure that it is effectively targeting the poorest, because it is completely involved in the operations and interacts regularly with borrowers. One advantage of Village Banking, on the other hand, is the independence of the Village Banks, giving borrowers a sense of pride and ownership, and also ensuring that their fate is not attached to the fate of any MFI. So far, MFIs utilizing both methods have made significant progress towards bringing the world's poor out of poverty. It will be interesting to see which method has the best long-term success in the decades to come.

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25 November, 2008

 

Is Micro-finance Development Aid?


by Tamsin Harriman

Micro-finance consists of making small loans to very poor people, who would not normally have access to financial services, so that they can grow their small businesses (known as micro-businesses). The goal is that the loan will enable the person to make more money from his or her micro-business, and keep expanding it to the point where the person no longer needs to take out loans, and has risen out of poverty.

There is some debate over whether micro-finance constitutes development aid or not. Typically, development aid is thought of as an organization (usually a charity, or a governmental program) either building or donating money for infrastructure, such as a school or better houses, in poor countries. However, according to Wikipedia, the definition is broader: "Development aid or development cooperation [...] is aid given by governmental and economic agencies to support the economic, social and political development of developing countries." Under that definition, micro-finance is quite clearly development aid, although it works with individuals rather than countries. Micro-finance allows poor people to make development improvements themselves, and encourages them to do so.

Famously, Grameen Bank in Bangladesh, which has successfully lifted 65% of its members out of poverty, created the "16 Decisions" as part of its loan program. Among other things, borrowers from Grameen have to swear: "We shall not live in dilapidated houses. We shall repair our houses and work towards constructing new houses at the earliest." Also, they must promise: "We shall educate our children and ensure that they can earn to pay for their education," and "We shall build and use pit-latrines." Thus, development is built into the Grameen model.

Many micro-finance initiatives (MFIs) do not have a requirement like the 16 Decisions, but it is logical that once a poor person begins making more money, that person will want to improve his or her living situation. While MFIs do not give poor people money, but rather allow them to borrow it, they still provide those people with development aid. They give people the ability to improve their own lives. This is far more sustainable than traditional development aid. If an external organization builds new houses for a village, that may help temporarily, but if the villagers do not have the money to maintain those houses, then eventually their houses will fall into disrepair again. On the other hand, if the villagers have the money to build new houses for themselves, and are able to earn enough to keep those houses in good condition, then their lives will have been permanently improved.

If an MFI (or several MFIs) are able to make that happen throughout an entire country, then they create the same outcome as that of development aid, only in a more sustainable way. Therefore, I believe that while micro-finance is not necessarily traditional development aid, it is certainly development aid, and has a much more permanent effect.

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24 November, 2008

 

Accurately Targeting the Poorest People with Village Banking


by Tamsin Harriman

Village Banking is a micro-finance methodology in which a micro-finance initiative (MFI) sets up community-run banks in poor villages. At first, the MFI makes loans to the Village Bank, which it then lends out to its members. The MFI also trains the Village Bank's leaders, and provides help with accounting when needed. Eventually, however, the goal is that the Village Banks have enough savings accounts and income from loan interest that they become self-sustianing, loaning out only their own money and operating independently.

With that goal in mind, the Village Banking methodology allows villages to self-select their members, without input from the MFI. This is great because it gives members a real sense of independence and ownership of their Village Bank. It also allows the Village Bank to expand more organically (new members can join whenever the Village Bank decides to allow them, rather than having to wait for approval from the MFI). However, it can create some problems. Because the relatively wealthier villagers are usually more influential in the community, they are often allowed membership in the Village Bank even though they do not meet its selection criteria (which are suggested, though not enforced, by the MFI). These are often people who could utilize the traditional banking system, but choose to join the Village Bank instead. Unfortunately, their participation often means that the poorest people are less able to benefit from the Village Bank, because of lack of capacity.

Since the goal of micro-finance is to help the very poorest people lift themselves out of poverty, this situation is not ideal. However, the problem is difficult to solve. In order to prevent this situation entirely, the MFI would have to become part of the screening process for new members, taking at least part of the responsibility away from the Village Banks. Unless the MFI wants to remain involved in the Village Banks' operations indefinitely, however, this is not a viable option. One solution (though far less certain of success) is for the MFI to consistently remind the Village Banks of why they were created, what their mission is, and which demographic they should be targeting.

One MFI in Thailand that is beginning to experience this problem is the Common Interest Foundation in Chiang Mai. They are currently working to implement a third solution, one that strikes a decent balance between the previous suggestions. Common Interest is now researching potential areas for expansion even more carefully, in order to make sure that it only sets up operations in villages that are not only very poor, but in which all or most of the villagers meet their poverty criteria. This way, the Village Banks are free to choose their own members, and the MFI does not have to worry about who is allowed to join. This solution is good because it allows both the MFI and the Village Banks to achieve their goals. However, it is not perfect, because again, the MFI does not constantly monitor its Village Banks. Therefore, given the available solutions, MFIs using the Village Banking methodology must accept that there is always going to be the risk of this problem developing. It is worth the risk, though, for the benefits of Village Banking.

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18 November, 2008

 

The Importance of Savings in Microfinance


by Tamsin Harriman

Thai Finance Ministry recently proposed a plan to extend 110 billion baht in loans to rice farmers. The Thai government's interest and participation in micro-finance is commendable, but perhaps it’s not the best approach. While loans alone may help alleviate poverty temporarily, they are not a sustainable solution. Borrowers often become trapped in a "loan cycle", in which they keep having to borrow over and over again to even maintain their farms or businesses. However, by encouraging or even requiring borrowers to open a savings account (with mandatory deposits) if they wish to take out a loan, this unsustainable situation can be prevented. Instead of always having to take out more loans, borrowers can tap into their savings when they need to invest in their businesses, their houses, their children's schooling and many other things that can improve their, and their families', lives. In addition, a savings account provides easily accessible extra cash, which is vitally important in case of an emergency (e.g. a natural disaster that wipes out a farmer's crops).

Many MFIs, in Thailand and worldwide, have already realized that savings is an essential part of micro-finance. A focus on savings not only benefits borrowers; it also benefits MFIs. This year Common Interest Foundation, in Northern Thailand, transitioned from a loans-only program to Village Banking, which heavily emphasizes saving. Since doing so, the foundation has realized significantly higher repayment rates - most of its original Village Banks have already paid off their loans, with a repayment rate of 100%. Many other MFIs, including Grameen Bank, whose repayment rate is now 98%, have experienced similarly positive results since adding savings to their programs.

The Thai government's micro-finance programs have poor repayment rates. Its Village Fund program has a repayment rate of only 50%, as previously discussed. As the above evidence suggests, adding a savings requirement to their loans could greatly improve the situation. If the Thai government wants its programs to be sustainable, and to permanently improve the lives of its poor, it needs to encourage savings, not simply give out more loans.

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