They form a group to borrow so that each guarantee for the other. Which is the most popular microfinance model around the world. This slide permits mfis intermediation costs to be brought much lower and thus to charge lower interest rates to borrowers 26. Cgap 1818 h street, nw msn q4400 washington, dc 20433 tel. Cooperative model in microlending is proving to be very successful as the cooperative institutions utilize the local economic resources and are very instrumental in mobilizing microsavings and microlending. Contents introduction to micro finance scenario of micro finance in india benifits of micro finance the different models of microfinance self help group model grameen model joint liability group cooperative model conclusion. Group lending, joint liability, and social capital columbia. Considering the diversity of country, mero microfinance has adopted various lending methodologies as described below. Credit delivery methodologies used by microfinance. Microfinance services are provided with different methods in india.
This was the origin of the idea dating back to the birth of microfinance in the 1970s. Grameen bank gb model following basic principles of gb model with suitable local modification, through which lending to especially group of women on centre up to 8 groups based on group centre guarantee. The group model is closely related to, and has inspired, many other lending models. In this model, individuals must form a group of five and receive a five day financial training in order to receive a loan from grameen. The group lending model is a cornerstone of the grameen methodology. The role of program design, intragroup risk pooling, and social cohesion, economic development and cultural change, 463, pp. The paper commences with a description of the two main types of lending methods in microfinance the group lending and the individual lending. Currently in india there are three models prevalent in the microfinance lending space jlg joint liability group, shg selfhelp group and shg bank linkage. Financing microfinance the icici bank partnership model bindu ananth banks in india usually work with highquality mfis to reach poorer clients, rather than serving them directly themselves capital constraint is an issue impeding scaling up of microfinance in india. Lending technology prompt approval and disbursement of micro loans lack of extensive loan records collateral substitutes. Moreover, we show that microfinance institutions offer group loans when the loan size is rather large, refinancing costs are high. Microfinance programs have been introduced with the aim of developing microenterprises. Group versus individual liability for microfinance borrowers in the philippines although the success of microcredit was originally attributed to the group loan model, there is little evidence on the relative impacts of individual lending versus group lending on household consumption, income. For instance, the offering of individual microcredit products is increasingly replacing the traditional grouplending model.
Crowdfunding and crowdmicrofinance, an evolution of. The previous models of lending to low income people were state sponsored programmes like integrated rural. Microfinance has been feted for introducing innovations in credit contracts, particularly group lending and installmentlending. Microfinance lending the cooperative model by radhika. This paper discusses the various models of microfinance lending in general and the cooperative model of microfinance lending in specific. The group method is one of the most common method of lending in microfinance where the basic unit of operation is a group of individuals.
Grameen bank gb model following basic principles of gb model with suitable local modification, through which lending to especially group of women on centre up to 8 groups based on groupcentre guarantee. The incentive to repay the loan is based on peer pressure, if one group member defaults, the other group members make up the payment amount. Based on an analysis of traditional financing models and icici. The group lending model, first used in bangladesh, may not be exactly.
The emergence of innovative group lending models in the field of microfinance is celebrated as a contractual innovation that has achieved the perceptible miracle of enabling previously unbankable or marginalized borrowers to lift themselves up by their own bootstraps by creating social collateral to. Canada, through the canadian international development agency cida, has committed to the targets set by both the oecd international development. Microfinance banks mfbs, ngomfis, and rural support programs rsps. Differences in lending methodologies in microfinance. Credit lending models is an attempt to document the various models currently being used by microfinance institutions throughout the world. This paper uses proprietary data on 1,335 microfinance institutions between 2005 and 2009, jointly serving 80. Credit delivery methodologies used by microfinance institutions. Microfinance and its different models in india authorstream. These include grameen, community banking, village banking, selfhelp, solidarity, peer pressure etc. Group lending versus individual liability for microfinance.
Community banking cb modelfollowing basic principles of selfhelp. Nevertheless, the microfinance sector in kenya has largely adopted the bangladeshi model and runs two broad microcredit programs. More broadly, microfinance demonstrates a new mode of development intervention, one. I am particularly pleased with the explicit focus on consumers and their needsthis, together with the onset of technologybased delivery models, has been the most important. Mar 16, 2011 according to this report, group lending in microfinance is broken down in two major categories. Business models and scaling up microfinance continued in order for a cdfi to scale up its microfinance activities, the components of its business model need to be consistent in focus. For instance, the offering of individual microcredit products is increasingly replacing the traditional group lending model. Institutions that stay closest to their original mission are the most efficient. This week i have been reading up on the various lending models used in microfinance and i found the diagram below, depicted in this russian microfinance project report and adapted from the care savings and credit sourcebook, to be very useful for my analysis. Brac programmes, more often than grameen bank, capitalize on this opportunity to provide regular contact with a health educator. The regular meetings associated with the group based lending models of microfinance programming provide a forum for education and training. Group lending terms from the understanding that customers from lowincome level could not afford collateral for an individual loan.
Benchmark the efficiency of microfinance institutions with different business models. The grouplending model of microcredit is a development intervention in which smallscale credit for incomegeneration activities is provided to groups of. From a grouplending model, in offline microfinance, we slide to one of groupinvest ing which will fund an individual borrower in online microfinance. Building financial systems for the poor key principles of microfinance 1. Microfinance has come a long way, and the mfis have tweaked and innovated with these early prototypes, based on considerations like cost and customer service, to invent different ways of collectiontoday, there are. The poor need a variety of financial services, not just loans. Microfinance industry in india can be traced back to mid of 1970s when ngo. Group lending model a panacea to reduce transaction cost. Lending technology prompt approval and disbursement of micro loans. Group method and 2 individual method group method this is one of the most common methodologies for providing microfinance. You may want to organize a group of traineesvolunteers and invite a language teacher. A lending mechanism which allows a group of individuals often called a solidarity group to provide collateral or loan guarantee through a group repayment pledge. Ghatak and guinnane 1999, armendariz and morduch 2000. They include, associations, bank guarantees, community banking, cooperatives, credit unions, grameen, group, individual, intermediaries, ngos, peer.
These microfinance providers mfps reached a total of 2 million borrowers in fy10 and managed to grow by % and 40% in credit and savings outreach. Economic theorists have been particularly interested in group lending, and nearly all of the economic work on microfinance focuses on the incentives induced by joint liability in group lending contracts, building on lending models pioneered by microfinance leaders like bangladeshs grameen bank and bolivias bancosol. Dieudonne, parc valrose, 06108 nice cedex 2, france abstract in a previous paper 4, we have introduced a mathematical version of a microcredit model build on the pio. Important theories and models of microfinance economics essay. Business india, compulsary savings, credit delivery methodologies, functioning of mfi, group lending, individual lending, joint liability group, legal framework microfinance, microfinance sector development and regulation act, microfinance, microfinance bill 2010, microfinance institutions in india.
The new microfinance handbook fills a critical gap in the current literature on financial inclusion. According to the act, microfinance institutions mfis hereinafter are classified into and. We analyze the incentive mechanisms in both individual and group contracts. Evolution of microfinance in india nabard initiated the self help group lending model self help bank linkage model which later evolved to the current hybrid self help group shg and joint liability group jlg models in india with the policy backing of the reserve bank of india and started linking the same to banks. According to this report, group lending in microfinance is broken down in two major categories.
Institutions that attempt to pursue a double bottom line are relatively inefficient. Microfinance institutions are using various credit lending models throughout the world. The emphasis from the very outset is to organisationally strengthen the grameen clientele, to build their capacity to plan and implement. The ability of microcredit to combat poverty remains hotly debated. Lending practices can substantially improve efficiency for. However, a large part of microfinance institutions rather offers individual instead of group loans. In its original vision, microfinance entailed providing small loans for productive purposes. While jlg and shg models are employed by nbfcmfis and small finance banks, shg bank linkage model is followed by commercial, corporate and regional rural banks. I am particularly pleased with the explicit focus on consumers and their needsthis, together with the onset of technologybased delivery models, has been the most important shift in the microfinance field over the past 15 years. Defining social collateral in microfinance group lending. The group method is one of the most common method of lending in microfinance where the basic unit of operation is a. The incentive to repay the loan is based on peer pressure, if one group member defaults, the other group members make up the.
In theory, at least, lending was based on joint liabilityor the idea that a second member of the group could not get a loan until. Analysis of the effects of microfinance on poverty reduction. Microfinance, also called microcredit, is a type of banking service that is provided to unemployed or lowincome individuals or groups who otherwise have no other access to financial services. The russia microfinance project lending methodology module. Mathematical models for individual and group lending in micro.
Microfinance is typically associated with joint liability of group members. Mathematical models for individual and group lending in. Microfinance institutions aim to serve customers illserved by traditional commercial banks and thus the associated business model is challenging by definition. And yet the industry has achieved impressive scale reaching 211 million customers globally in 20. Microfinance models include the grameen bank model, the mc2 model, the village banking model, and the sksmicrofinance model. Borrowers from micronance programs have usually been organized in groups, whose members are liable for each others default. Bangladeshs highly successful grameen model with the allegedly. Microfinance going digital while retaining the humane touch. Evidence from group lending in guatemala, economic journal, 109457, pp. This is where the target community forms an association through which various microfinance and other activities are initiated. Favorable costbenefit ratios then depend on low costs. Currently, as outlined in rauf and mahmood 2009, three different microfinance models are operative in the country, namely.
A read is counted each time someone views a publication summary such as the title, abstract, and list of authors, clicks on a figure, or views or downloads the fulltext. They include associations, bank guarantees, community banking, cooperatives, credit unions, grameen, group, individual. This new medium of communication, by getting rid of geo. Group lending versus individual lending in microfinance. Group decisions, group supervision, group pressure and group responsibility are better than individual collateral. The regular meetings associated with the groupbased lending models of microfinance programming provide a forum for education and training. After years of rapid growth, various microfinance institutions have been struggling with. Microfinance methods page 44 a microenterprise training guide for peace corps volunteers activity 2.
Group method primarily involves a group of individuals, which becomes the basic unit of operation for the mfis. Customers value proposition infrastructure costrevenue structure every organizations business model is different. They include, associations, bank guarantees, community banking, cooperatives, credit unions, grameen, group. Determinants of repayment performance in credit groups.
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