MABS Approach to Microfinance

Microfinance has evolved as an economic development approach intended to benefit low-income groups. The term refers to the provision of financial services to low-income clients, including the self-employed. Financial services generally include savings and credit, and some microfinance organizations also provide insurance and payment services.

Microfinance activities usually involve:

• Small loans, typically for working capital;
• Informal appraisal of borrowers and investments;
• Access to repeat and larger loans based on debt capacity and repayment performance;
• Streamlined loan disbursement and monitoring;
• Secure savings products.

Microfinance clients are typically self-employed, low-income entrepreneurs in both urban and rural areas. Clients are often traders, street vendors, service providers (hairdressers, tricycle operators), small restaurant operators, artisans and small cottage industries. Usually their activities provide a stable source of cashflow and income (often from more than one activity).


Principles of Financially Viable Lending to the Enterprising Poor

Offer financial services that fit the preferences of low-income entrepreneurs.

These services include:

• Short loan terms, compatible with microenterprise business and income patterns.

• Repeat loans. Full repayment of one loan brings access to another although the size depends on the client's cash flow. Repeat lending allows credit to support financial management as a process rather than as an isolated event.

• Relatively unrestricted use of the loan. While most programs select customers with active enterprises (and thus the cash flow for repayment), they recognize that clients may need to use funds for a mixture of personal and business purposes.

• Very small loans, appropriate for meeting the day-to-day financial requirements of businesses. Average microenterprise loan sizes for rural banks in the Philippines start as low as PhP3,000 per client.

• Customer-friendly approach. Locate outlets close to entrepreneurs, use extremely simple loan applications (often one page), and limit the time between application and disbursement to a few days. Develop a public image of being approachable to low-income people.

 

Streamline operations to reduce administrative costs.

• Develop highly streamlined operations, minimizing staff time per loan.

• Standardize the lending process. Make applications very simple and approve loans on the basis of easily verifiable criteria, such as the existence of a going enterprise.
• Decentralize loan approval.

• Maintain inexpensive offices while providing convenience to clients, such as through smaller banking outlets, sometimes called "money shops." Money shops provide easy access to established on-site banking facilities where money can be borrowed quickly and conveniently.

• Select staff from local communities, including people with lower levels of education (and hence lower salary expectations) than staff in formal banking institutions. 


Motivate clients to repay loans.Concentrate on providing motivation to repay. These motivations include:

• Joint liability groups. An arrangement whereby a group of borrowers guarantee each other's loans is a commonly used technique. It has proved effective in many different countries and settings worldwide. Individual lending, based on the borrower's character as opposed to collateral, can be effective when the social structure is cohesive, as has been demonstrated in many of the areas served by rural banks in the Philippines.

• Client Incentives. Incentives such as guaranteeing access to subsequent loans motivate repayment, as do increases in loan sizes and preferential pricing in exchange for prompt repayment. Institutions that successfully motivate repayment develop staff competence and a public image that signals that they are serious about loan collection. 


Charge full-cost interest rates and fees.

The small loan sizes necessary to serve low-income clients may result in costs per loan that require interest rates higher than commercial bank rates (though significantly lower than moneylender rates). Low-income entrepreneurs have shown the willingness and the ability to pay such rates for loan services that fit their needs.


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