The Objectives for this Module include: -Becoming familiar with models of lending approaches in microfinance -Identifying strengths and weaknesses of the main lending approaches -Reviewing the phases of group formation

1. Principles of Microfinance Refresher
MODULE 2
Microfinance
Methodologies
Choosing a Microfinance Lending Model
Types of Group Lending
Individual Lending Model
Next Steps

2. Introduction
Choosing a Microfinance Model:
There are several ways to deliver microfinance services. Three
factors are considered when selecting the best approach:
Given the responses to the above questions, there are two main
models of lending approaches:
● Group Lending
● Individual Lending

3. Managing Credit Risk
Before issuing a loan, micro-lenders assess credit risk primarily by
investigating the applicant’s character, followed closely by the
capacity of the business and household to repay the loan.
Character is assessed through interviews with neighbours,
customers, suppliers and community leaders. Capacity is
determined by the cash flow of the entire family economic unit. It
does not take into account the effect of the loan.
In Module 3 we will explore additional topics around Credit and
Risk Management.

4. Managing Cost
There are two ways of managing costs of a Microfinance Institution
(MFI):
1. Minimizing expenses through appropriate budgeting and
monitoring systems. This is not unique to micro-finance.
2. Maximizing the productivity and efficiency of the
organisations. Efficiency means product design, human
resource management and the organisational structure.

5. Target Market
By adopting an inclusive approach to their markets, MFIs can
diversify their risks and cross-subsidize between market segments.
MFIs can reach borrowers of the same economic status and serve a
diversity of low-income clients.

6. Group Lending
There are five (5) types of Group Lending Models:
1. Village Banks
2. Group of Groups
3. Solidarity Groups
4. Accumulating Savings and Credit Associations
5. Savings Groups
In all Group Lending models there are the following traits:
● Groups are involved in granting and recovering the loan
● Group lending does not usually involve a group loan, rather it
loans to individuals who form a group as a guarantee
● The group mechanism reduces the risks and costs associated
with providing loans to low income persons who lack traditional
collateral, business plans, business records and credit
Flashcard Activity

7. Village Banking
Example: Freedom From Hunger
Ghana - FFHG
About
Village Banking is organized by implementing agencies, for example
local partners of NGOs, working with local MFIs on such tasks as
outreach, bank formation, orientation, initiation of savings and the
development of bylaws and election processes. Village Banking is
modeled on the pioneering work of FINCA in Latin America. This Model
has been successfully implemented in 28 countries.
Adaptations
Merging theory with experience, practitioners of Village Banking have
extensively adapted it from the original model. These adaptations are to:
• Reduce exposure to risk and strengthen accountability
• Standardize and tighten controls
• Change management policies with respect to the external and
internal account
• Offer an integrated approach that combines credit with education

8. Group of Groups
Example: Grameen Bank
About
The Group of Groups approach relies on social pressure from a
wide network to reduce Credit Risk. Characteristics include:
• Loans are made by groups of five people who are held jointly
liable for loans made to each group member
• Several groups are joined to form a “centre” through which an
additional layer of guarantee is added
• Loans are made for one-year terms, with weekly repayments
• Borrowers are required to make small, regular contributions to a
group savings fund and an emergency fund
Grameen Notes
Grameen pursues a social development agenda, embodied in its
“Sixteen Decisions” for members to adhere to, which span topics
including sanitation, nutrition, family planning, and education.

9. Solidarity Group
About
Example: ACCION International, LA
In this approach, individuals form a group to co-guarantee each other’s
loans and provide support and encouragement to its members. This is
thought to lead to a feeling of wellbeing and a sense of dignity and
empowerment. The Field or Credit Agent should only act as facilitator as
the Solidarity Group provides the key role in reviewing and approving
loans. Characteristics include:
• Member Screening: Members self-select 5-15 individuals who are well
known, trusted and respected, engaged in an economic activity to repay
a loan, have good standing amongst peers
• Organisation: Prospective clients are organised into manageable
geographical groups to allow for smooth coordination and logistics
• Well Managed: Routine record keeping to keep project costs down
• Loan Review: Members decide who will actually receive a loan. This
exercise is sometimes done in conjunction with staff of the rural bank or
financial institution.
Success is based on community sensitization, group development, and
business management skills development

10. ASCAs & ROSCAs
About
Accumulating Savings Credit Associations (ASCAs) and Rotating
Savings and Credit Associations (ROSCAs) form another type of
informal group lending where members come together for a defined
period of time to save and borrow together. Every transaction is seen
by all members of the group and each member contributes the same
amount at each meeting with one member taking the entire sum.
These actions are done for transparency and often used in very poor
or low-literacy areas.

11. Savings Groups
About
Members of savings groups save together, lend their savings to
each other with interest, and share the profits. Similar to small local
credit unions, savings group (SG) projects have evolved specific
technologies in which members provide their own savings and credit
services at negligible cost, while retaining earnings and capital in their
own communities. They are simple, transparent, and autonomous.
Savings groups are not only a viable alternative for the vast
number of people unlikely to be served by brick-and-mortar financial
institutions, they are the catalyst for enhanced social capital,
improved gender relations, women’s leadership, and community
social and economic development. These pioneering projects have
demonstrated the power of saving over and over again. Now they are
achieving very rapid growth, increasing in number and scale.
How Savings Groups Complement Microfinance:
• A highly decentralized, non-institutional savings-led approach to
microfinance shows great promise
• It is an emerging movement (past 20 years). In some places,
savings groups complement the existing services of regulated
formal financial institutions. In others, they reach people who have
been completely excluded from access to any financial service,
formal or informal.

12. Group Development
There are nine stages of Group Development:
1. Defining the group and its role
2. Determining the importance of internal regulations
3. Elaboration and adoption of internal regulations
4. Election of Leaders
5. Savings mobilization
6. Record keeping
7. Conflict resolution
8. Loan procedures
9. Loan disbursement
and management

13. Individual Lending
About
Individual Lending is focused on the needs of the client. Individual
loans are flexible, allowing service characteristics to be tailored to
each borrower. Interest in individual lending is rising because of the
success of prominent individual lenders. Many group lenders are
seeking to add individual loan products.
Types
Cash Flow Lending: These loans are not based on collateral,
although they are often secured to prevent the borrower from pledging
assets to other creditors and as a test of the borrower’s commitment to
repayment. The size of cash flow loans in determined primarily by the
projected cash flow of the borrower available to service the loan, by the
length of time for which the lender is willing to have funds committed,
and by the interest rate.
Asset Based Lending: Lending against inventory, accounts
receivable, or land and buildings with such security. Formal credit is
asset based and therefore usually not appropriate for poor.

14. Next Steps...
Once you have finished reviewing these slides you may proceed to the
following sections of this Module (if you opened these slides in a
separate window, close out this window or tab and return to MODULE
2 in CourseSites):
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•
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Review the Resources
Complete the Journal Reflection and FlashCard Review
Check your understanding with the Self-Review
Note: A PDF version of this slide deck is also available for download
Founded in 1999 as the Microenterprise Development Institute, the Carsey Institute’s
Sustainable Microenterprise and Development Program (SMDP) provides training and
networking opportunities for practitioners in the fields of microfinance, enterprise
development, social enterprise, and community-based and rural development. Over
the past fourteen years, we have trained more than 1,800 practitioners from more than
one hundred countries around the globe. The SMDP offers an intensive professional
training experience with a concentration on program planning and implementation of
client and community inclusive economic development strategies.
http://carseyinstitute.unh.edu/smdp