Introduction to Micro finance - the Lending Methodology

1. Introduction to Micro finance - the
Lending Methodology
Ms: Heba Hassan +249906850429

2. • Microfinance provides a wide range of
financial services to low-income clients,
including self-employed and low earning
individuals who are working in informal
sectors.

3. • The core objective of microfinance is to create
a favorable environment for the low income
self employed and near-poor households in
which they have permanent access to an
appropriate range of high quality financial
services, including not just credit but also
savings, insurance, and general banking
services.

4. • Microfinance provides a comprehensive range
of financial services to the "unbanked people"
working in informal sectors which best fits
their needs and affordability.

5. Key points:
• Unbanked:The segment of the society who is
economically active and particularly consists
of poor or low income earning people and
does not have an access to commercial
banking services.

6. • Informal Sector
• The sector of the society which comprises of
typically low income individuals and self
employed persons running unorganized
businesses.
• • These businesses do not maintain financial
statements.
• • Usually not tax payers.
• • Do not have access to commercial banking
services.

7. • Range of Financial Services : These financial
services comprise of various loan products,
saving products, insurance and general
banking facilities.

8. • Needs and affordability: It is important to
design services and products that suit the
requirement of the target market. For this
purpose assessment of the client's need and
his / her financial worth should be carried out
in such a manner that paying back does not
become a burden.

9. Challenges faced by poor people:
• Does not have access to commercial banking
services because of the following facts
• • Commercial banks do not entertain clients with
little amount of cash.
• • Commercial banks do not offer specialized
products.
• • Transactional and service cost is unaffordable.
• • Unavailability of financial statements
• • Unable to provide collateral security.

10. Fallacy about poor people:
• Poor people do not save.
• • Poor people are reluctant to go to a formal
financial institution.
• • Poor people are not an unacceptable credit
risk.
• • Poor people do not plan for future.

11. Characteristics of Informal Sector:
• Do not maintain financial statements.
• • Usually not tax payers.
• • Do not have access to commercial banking
services.
• • Borrow money from informal money lenders
(friends, relatives, money lenders)
• • Save money in informal ways (domestic
money keeping, purchase cattle, Beecees /
Committees)

12. Need Analysis:
• Lifecycle Needs : such as weddings, childbirth,
education, homebuilding, widowhood, old age.
• Personal Emergencies : such as sickness, injury,
unemployment, theft, harassment or death.
• Disasters : such as fires, floods, and man-made
events like war or bulldozing of dwellings.
• Productive Purpose : expanding a business,
buying land or equipment, improving housing,
securing a job (which often requires paying a
large bribe), etc.

13. Microfinance Products
• Loans
• • Savings
• • Insurance
• • Guarantees
• • Money Transfer

14. Microfinance Lending Products:
• Microfinance lending products mainly includes
• Group Lending :
• Solidarity Group Lending
• • Group of Groups (Grameen Model)
• Individual lending:
• Individual / Business Loan
• Housing Loan

15. Group Lending:
• • Provide credit services to formerly
"unbankable"clients in the same community,
same profession or locality.
• • Work around the absence of collateral by
creating "peer pressure" through joint liability
for loan repayments.
• • Establishment of credit to the very poor on a
minute scale.

17. Solidarity Group Lending:
• Borrowers form groups, usually of three to
seven members to avail a loan.
• • MFI issues one loan to the group and holds
the group and each of its members liable
jointly and or separately for the repayment of
loan.
• • Groups go through several cycles, with loan
amounts increasing, in principle, during each
cycle

18. Group of Groups Lending: (Grameen
Model)
• Borrowers form group, usually of five
members.
• • A number of these groups (minimum of five)
come together to create a Center.
• • Center and group members screen and
qualify loan applicants.
• • MFI issues several loans to group members
and holds the group and each of its members
liable jointly and/or separately for the loan.

19. Individual Lending:
• • MFI lends to one borrower on individual
basis.
• • Loan does not have "protective layer" of
group to mitigate credit risk.
• • Precise assessment of the client's credit
worthiness and need is required to allow a risk
free loan.

20. Lending Methodology
• Eligibility Criteria:
• The key points to be considered are
• • Age of Business
• • Age of Client
• • Location of Business
• • Business Registration
• • Loan Purpose
• • Back ground check

21. • Assessment of Credit Worthiness:
• • Credit worthiness is the value of the
borrower to avail a microfinance loan.
• • It is a composite of gross income of the
prospect, less its business and personal
expenses, rational of his capacity to repay the
loan.
• • Loan size must be determined specifically to
fit the client's need.
• • Estimate capacity to repay.
• • Accurate assessment of the prospect is the
key to a successful relation with the MFI.

22. Relationship Building and Loan Follow
up:
• A Loan officer is assigned to a particular client who is
responsible for the account maintenance i.e sales and
collection of repayments.
• • Search of further references.
• • Maintain client contacts even clients in good standing
or when delinquent.
• • Provide incentive for regular repayment (extended
credit, access to preferred services, other incentives)
• • Quick response in case of non-payment. Start by
friendly reminders by loan officer and then tighten up
collection efforts.