The Grameen Bank of Bangladesh has developed a joint liability model that its MFIs are using suited for local conditions.
When choosing a village the MFI conduct a comprehensive survey to brief the potential for operations and the local conditions in a village. The MFI are evaluating some key factors like village population, degree of poverty, road accessibility, political stability and safety. When a village has been selected, the MFI introduces its mission, methodology and the services they are offering.
After the informational presentation interested women are gathered in group formations. They have to be in the age between 18 and 59. The women put them self together in groups of five to serve as guarantors for each other. Earlier experience has shown that a group of five persons is small enough to create group pressure between the members, enforcing them to be loyal to each other. In case someone of the group members are not able to repay the loan the group is big enough to help with the payments. The company does not influence the selection of group members nor the decision regarding the income generation activity nor the loan amount they intend to take. Group members must live close to each other and cannot be related to each other.
|If a borrower defaults on her loan, the entire group typically is penalized and sometimes barred altogether from taking further loans. This peer pressure encourages borrowers to be very selective about their peer group members and to repay loans in full and on time.
Then the group training begins, usually as a five day program. The purpose is to educate the members in the procedures of the financial products, delivery methods, calculation of interest rates, business development skills and how to sign their names. The members are also taught in quality management, to identify an income generation activity, how to set prices and how to market. They field staff also build a culture of credit discipline and collective responsibility. The field staff makes sure the members qualifies for the program and collect data for future analysis. Within the village, a center is created collecting the groups. The center is responsible for the payments of all groups, enabling a dual liability system. When the villagecenter is created the financial transactions can begin.
The groups meet weekly in the villagecenter where they can discuss new loan applications, loan utilization, and community issues. The field staff of the MFIs conduct the meetings with rigid discipline in order to sustain the credit discipline of the group. All financial transactions are conducted during the meetings.
Microfinance is a relatively new segment of the market economy that is why institutions created in this segment have short experience in their activities, and their personnel is not sufficiently experienced and qualified. Taking this into consideration, staff of these institutes is recommended to follow the internationally recognized principles of microfinance:
- thorough examination of potential clients of the microfinance institution;
- thorough estimation of business viability and also factors which can positively or negatively affect the results of work in specific conditions;
- thorough registration of documents and contracts related to loan issuance and microfinance services providing;
- keep in touch with client in combination with monitoring of the terms of paying a credit, interests payments and with the aim to find out potential and real problems;
- setting of interest rates for microfinance services compatible with market ones;
- quick reaction to any problems which can complicate the perspectives of getting of issued credit payed back.