BTL 758 - Microfinance Delivery Methodologies - 01

 

The Banking Tutor’s Lessons

BTL 758                                                                          27-02-2025

Microfinance Delivery Methodologies - 01

 

"Microfinance: Credit Lending Models" is an attempt to document the various models currently being used by microfinance institutions throughout the world.

 

There are about 14 models are in use across the Globe. They are

 

01. Association Model

02. Bank Guarantee Model

03. Community Banking Model

04. Cooperatives

05. Credit Unions

06. Grameen Model

07. Group Model

08. Individual Model

09. Intermediaries Model

10. NGO Model

11. Peer Pressure Model

12. ROSCA Model

13. Small Business Model

14. Village Banking Models.

 

In reality, the models are loosely related with each other, and most good and sustainable microfinance institutions have features of two or more models in their activities.

Many of these models are "formalized" versions of informal financial systems. Informal systems have historical precedents that predate modern banking systems. They are still in existence today used mostly by low income households who do not have access to formal banks.

 

Association Model

 

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, women; 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. Association Model is closely related to the group model and similar models.

 

Bank Guarantee Model

 

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 on-lend or start microcredit programmes.

 

Community Banking Model

 

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. This is closely related to the Village Banking Model.

 

 

Cooperative Model

 

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 Union Model

 

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, labour 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, colour or creed. 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.

 

 

(Contd…Part 2 on 3^rd March, 2025)

Sekhar Pariti

+91 9440641014