Methods of Credit Delivery

4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 72

Introduction
The most well- known lending methodologies are

 Individual lending
 Grameen Bank solidarity lending
 Latin America solidarity group lending
 Village banking
 Self reliant village Banks

4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 73

Method Of Credit Delivery
 They can be divided into two broad categories
 Individual Lending
Individual loans – are delivered to individuals based on
ability to provide the MFI with assurances of
repayment and some level of security.
 Group lending
Group based approaches – loans granted to groups,
that is either to individuals who are members of a
group and guarantee each other’s loans or to groups
that then sub loan to their members.
4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 74
INDIVIDUAL LENDING
 Most MFIs have successfully developed effective models to lend
to individuals that use both formal lending and informal lending
as done by money lenders.
 Formal FIs, their lending decision base on business and client
characteristic.
 Including cash flow, capacity, historical financial results,
collateral, and character.
 Personal guarantors are sometimes used to motivate loan
repayment.
 Formal sector lending practices are often not suitable for MFI, as
many micro business or business owners do not have required
assets or adequate financial
4/8/2024 reporting
Fredynandy M. John system.
(Banking & Fin Svs -IFM) 75
INDIVIDUAL LENDING
In the Informal sector lending
 They approve loans based on personal knowledge of the
borrower rather than on the sophisticated feasibility
analysis, also they use informal collateral.
 Less bureaucratic procedures in responding to clients
needs.
 Money lenders demonstrate that the poor do repay loans
and able to pay relatively high interest rates.
 But in most cases loan from money lenders are often not
taken for productive purpose rather for emergency or
consumption smoothing.
4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 76
INDIVIDUAL LENDING
Features of individual lending model
 Rely heavily on information to assess risk, not from documents
but through inspection of business and households
 Recommendations from respected persons
 It involves assessment of character, collateral and capacity for
credit decisions. However, with varied emphasize, where the
primary one is character, followed by capacity and collateral
 Non-traditional collateral are commonly acceptable such as
household furniture, jewelry.
 They primarily demonstrate borrowers commitment and not
necessarily as the secondary source of repayment.
4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 77
INDIVIDUAL LENDING
Features of individual lending model
 Screening of potential clients by credit checks and character
references.
 Tailoring of loan size and term to business needs
 The frequent increase over time for the loan size and terms to
business needs.
 Efforts by the staff to develop close relationship with clients
 Referees, financial analysis, credit history
 Frequent and close contact with individual clients.
 It is more/ often successful in urban where client access is
possible.
4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 78
INDIVIDUAL LENDING
Features of individual lending model
 Individual lending can also be successful in rural areas,
especially through savings and credit cooperatives or credit
unions.
 Loans to individuals are usually larger than loans to members in
groups
 Provide revenue base to cover the costs of delivering and
maintaining the loans than group loans.
 Training and technical assistance may be provided by credit
officers, sometimes per fee- basis or mandatory.

4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 79

INDIVIDUAL LENDING
Features of individual lending model
 Use of commercial banks for collection and disbursement.
 E.g. (1) ADEMI (The association for development of micro-
enterprise) Dominican Republic
 2) FECECAM – Benin – rural areas

4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 80

ROSCAs
 ROSCAs is a group of individuals who come together and
make regular cyclical contributions to a common fund.
 Normally, Lump sum is given to a member in each cycle.

 Benefits of ROSCAs
 It provide access to financial services such as savings
and credit
 Provides lump sum amount of money to investor
 Democratic decision making among the members
 Equal distribution of group income
4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 81
ROSCAs
 Weaknesses of ROSCAs
 Easy to collapse in case of misunderstanding
 Lack flexibility as members have to wait for their turn to
receive loan.
 Lack of sustainability.
 Member failure to save when has surplus cash, until
regular group meeting.

4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 82

GROUP BASED LENDING
 It involves the formation of groups of people who have a
common wish to access financial services.
 Group - lending approaches frequently build on or imitate
existing informal lending and saving groups e.g Rotating
savings and credit associations (ROSCAS).
 Group-lending have adapted the ROSCAS model to
provide extra flexibility in loan sizes and terms and in
general to allow borrowers access to funds when needed
rather than to wait for their turn.

4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 83

GROUP BASED LENDING
 Borrower groups or guarantors help to assess the character
and capacity of micro-loans applicants e.g. Grameen Bank
– Bangladesh
 Stepped lending i.e. gradual increase of loans help to learn
about the borrower and enterprise.
 ACCION International’s solidarity group lending
 Grameen and ACCION, facilitate formation of small groups
(4 to 7 people) and make individual loans to group
members
 Other models like village banking used by FINCA utilize
larger groups of between 30 and 50 members , also lend to
4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 84

group itself rather than to individuals.

ADVANTAGES OF SOLIDARITY GROUP LENDING

 The use of peer pressure as a collateral substitute

 The group – based lending programs target the very poor,
who cannot meet the traditional collateral required by most
Fls rather guarantees are established as collateral
substitutes.
 It reduces certain institutional transaction costs; this is due
to shifting of screening and monitoring costs to the groups
 The grouping meetings held regular may tend to avoid or
reduces MFIs individual client’s business visit.

4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 85

DISADVANTAGES OF SOLIDARITY GROUP LENDING

 Group training costs tend to be quite high.

 Client transaction costs are high as well as more
responsibility is shifted from the MFI to the clients
themselves.
 Some members in groups may default, and other group
members may be punished for the irresponsible repayment
of other group members.
 If several members of a group encounter repayment
difficulties the entire group often collapses, leading to a
domino effect.
4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 86
GRAMEEN SOLIDARITY GROUP LENDING
 This was developed by Grameen Bank of Bangladesh to
serve rural, landless women wishing to finance income
generating activities.
 The model is prevalent mostly in Asia and it has been
replicated in other contents, such as Asia, Africa and Latin
America.
 Peer groups of five unrelated members are self-formed and
incorporated into village centres of up to eight peer groups
 Attendance of weekly meetings and weekly savings
contribution, group fund contributions and Insurance
payments are mandatory.
4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 87
GRAMEEN SOLIDARITY GROUP LENDING
 Savings done for four to eight weeks prior receiving a loan and
must continue for the loan duration
 Group fund is managed by group and can be lent to group
 Group member guarantee each other’s loan and are legally
responsible for repayment by other members.
 No further loans given if all members do not pay their loans on
time
 No collateral is required
 Loans are made to individuals within the group by the local
credit officer at the weekly meetings, initially two members
receive loan, after repayment two members will also receive a
loan etc.
4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 88
GRAMEEN SOLIDARITY GROUP LENDING
 Credit officers usually carry between 200 and 300 clients.
 They provide pre-credit orientation and minimal technical
assistance.
 Loan appraisal is performed by group members and centre
leaders.
 Credit is for six months to one year and payments are
made weekly.
 Savings are compulsory

4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 89

GRAMEEN SOLIDARITY GROUP LENDING
 Amount - $ 100 to $ 300
 In 1992, Grameen Bank lent to 2 million people
 Interest rates of around 12 to 16 percent
 Repayment rate is high, around 97 to 98 percent
(Waterfield and Duval’s, 1996)
 97% of the borrowers are women

4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 90

VILLAGE BANKING
 These are community – managed credit and savings
associations established to provide access to financial
services in rural areas, build community self-help groups,
and help member accumulate savings
 The model was developed in the mid 1980s by FINCA
(Foundation for International Community Assistance)
 The bank is financed by internal mobilization of members
funds, and loans provide by MFIs.
 A village bank consists of its membership and management
committee, that receive training from the sponsoring MFIs.
4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 91
VILLAGE BANKING
 Membership in a village bank usually ranges from 30 to 50
people, and most of whom are women
 Membership in a village bank is based on self selection
 The sponsoring MFI lends seed capital (external account) to
the bank, which then lends on the money to its members.
 All member sign the loan agreement to offer a collective
guarantee
 The loan amount to the village bank is based on an
aggregate of all members loan requests.

4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 92

VILLAGE BANKING
 Basically the amount varies btn countries, but commonly
they are small like $ 50 and typically short term loans (four
to six months)
 Repaid in weekly instalments.
 The amount of the second loan will depend on the
members’ savings during the first loan period through
weekly contributions
 The methodology anticipates that the members will have
saved a minimum of 20% of loan amount per cycle
(internal account).
4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 93
VILLAGE BANKING
 No interest paid on savings
 Regular weekly meetings or monthly are held to collect
savings deposits, disburse loans, attend administrative
issues, training by MFIs officers
 Members receive a share from the bank’s relending or
investment profits
 E.g. FINCA, CARE , Catholic Relief Services (CRs)

4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 94

SELF-RELIANT VILLAGE BANKS
 Also known as savings and loans associations
 They are established and managed by rural village
communities
 They differ from village banks in that they cater for the
needs of the village as a whole, not just a group of 30 to 50
people.
 The model was developed by a French NGO, The centre for
international development and research, in the mid 1980s
 The supporting program identifies villages where social
cohesion is strong and the desire to set up village bank is
clearly expressed.
4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 95
SELF-RELIANT VILLAGE BANKS
 The villagers themselves set the rules for their
organization.
 They elect the management and credit committee and two
or three more managers depending on the needs of the
bank
 The self-reliant village banks mobilize savings and extend
short term loans to villagers on an individual basis
 The sponsoring program does not provide lines of credit.
 The association acts as intermediary and negotiate lines of
credit with local banks.
4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 96
SELF-RELIANT VILLAGE BANKS
 This links the village banks to the formal financial sector
 There is no direct link between loan amounts and a
member’s savings capacity
 Interest rates are set by each village according to its
experience with traditional savings and loan associations
 Loans are to individuals and collateral is necessary, above
all it is village trust and social pressure that ensure high
repayment rates.
 Loans are paid in one installment
 E.g. Burkina Faso, Madagascar, Gambia (Village savings
and credit associations or VISACA)
4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 97
LATIN AMERICAN SOLIDARITY GROUP LENDING

 They provide loan to individual members in groups of four

to seven
 Member cross guarantee each other’s loans to replace
traditional collateral
 The model was developed by ACCION International in Latin
America and adapted by many MFIs.
 Clients are mainly informal sector micro business e.g.
Merchants, who need WC
 Group members guarantee loan repayment

4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 98

LATIN AMERICAN SOLIDARITY GROUP LENDING

 Access to subsequent loan depends on successful

repayment by all group members.
 Payment are made weekly at program office.
 The model incorporates minimal technical assistance to the
borrowers, such as training and organization building
 Credit officers work with between 200 and 400 clients do
not get to know their clients very well.
 Loan disbursement is made to group leader at branch office
who immediately distributes to each member.
 Credit officers make brief, occasional visits to individual
clients.
4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 99
LATIN AMERICAN SOLIDARITY GROUP LENDING

 Group members receive equal loan amount with some

flexibility in subsequent loan.
 Savings are often required but often deducted from the
loan amount at the time of disbursement rather than client
save prior loan.
 Savings save primarily as compensating balance,
guaranteeing a portion of the loan amount.
 Initial loan $100 to $ 200, subsequent no limit.
 Interest rates are high and service fees charged
 Very few voluntary savings products offered
 BancoSol Bolivia.
4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 100
 - End -

4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 101

 - Loan Processing by MFIs’ -

4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 102

Introduction
 Loan Processing follows steps similar to conventional
banking especially for MFIs whose credit technology is
individual micro-lending
 Lending process vary from one MFI to another and or one
product to another, however, it is important for an MFI to
have a clear set of steps for taking clients through the first
contact, analysis, approval, disbursement, monitoring and
repayment.
 Loan processing is a structured processes that go through
several steps before borrowers get the loan from MFI
 The most notable steps include
4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 103
Lending Steps
 Step 1: New Customer Introduction
 First client contact – screening with Loan Administrator
 Information session (optional)
 Completion of Application Form by client
 Step 2: Loan Appraisal
 Credit Officer conducts site visit to business and reviews
collateral options
 External checks and references
 Credit Officer completes Loan Appraisal form and Cashflow form
 Surprise visit to the company/business
 Final analysis and loan structuring
 Final review by Fredynandy
4/8/2024 Credit M.Manager
John (Banking & Fin Svs -IFM) 104
Lending Steps
 Step 3: Approval
 Submission to Credit Committee.

 Step 4: Disbursement
 Loan documentation.

 Step 5: Monitoring
 Monitoring and follow up of the client after disbursal.

4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 105

Client Screening
 It is the first step among steps required by loan officers to
complete loan application process
 Loan officer’s goals in client screening are:
 To screen out applicants who are not eligible for
borrowing under MFI’s eligibility criteria
 To sell the programme to eligible applicants
 To help applicants understand the institution’s products
and if they are in line with their expectations
 To fill in screening form (if any) for eligible customers

4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 106

Client Screening Form
 This is a form used to obtain key customer’s information
such as:
 Personal/Business information
 Loan amount requested
 Purpose of loan
 Whether loan amount fit with customer’s need
 Eligibility in accordance with MFI’s eligibility criteria
 Screening form is highly recommended because it screens
out the unsuitable clients and business and does not waste
the client’s and MFI’s time
4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 107
Client Screening Form
 MFI should reject clients sooner rather than later
 Dragging client along and then later on disqualifying him
creates a bad image for MFIs
 Screening should be used by MFI to eliminate borrowers
who do not qualify and enables loan officer to move ahead
with business that are eligible
 Client whose application has been rejected, loan officer
should explain the eligibility item clearly. This should be
done with care and respect for the client.
 If client fits all eligibility criteria, s/he moves to next step

4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 108

Information Session
 Purpose of information session is inform a larger group of
potential borrowers about individual lending program
 It is an option step; some MFIs tend to skip this step.
 It covers range of issues beginning with:
 Introduction
 Credit needs
 Loan products and services
 Individual lending methodology and collateral
 Loan parameters (size, term, rate and fees)
 Loan application process
 Loan default consequences
4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 109

 Required documentation and next step

Information Session
 Information session helps loan officers answer and clarify
issues related to loan programme
 Sometimes information session is used as marketing session
where loan officers sell programme’s products to clients
 After screening and information session, the potential
borrower will be given with application form
 Clients should fill this simple one page form on their own.
 Loan officer may wish to satisfy himself with some issue
appearing in the customer application form, only upon
proper clarification, then loan officer will go to next step.
4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 110
Loan Appraisal
 Loan appraisal is a thorough review of the applicant’s
situation and business.
 Loan appraisal will consider issues like:
 General baseline information (borrower, business etc)
 Loan impact on business
 Business information (business history, credit history,
management, customers, suppliers and competitors
 Collateral
 References
 Balance sheet & Cash flow information
 Credit recommendation
 Review and decision
4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 111
Cash flow Analysis
 Cash flow is important in individual lending methods. Cash
is what repay loan.
 Determination of cash flow in microfinance considers
household economic model and resource flow rather than
considering the business to which MFI will finance.
 Cash flow is also used to determine amount of loan that
potential borrower can borrow from the MFI.
 Analysis of cash flow and balance sheet of the business is
extremely important to loan decision making by MFI.

4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 112

Site Visits
 Site visit enable loan officer to assess borrower in an
objective way.
 Site visit allows loan officers to inspect business premises
and confirm what borrower stated and wrote about
business’s …
 Premises
 Production and sales
 Assets
 Inventory amounts and turnover
 During the site visit, loan officer wears ‘detective hat’
 However, site visitFredynandy
4/8/2024
will M. be helpful if loan officer will confirm
John (Banking & Fin Svs -IFM) 113
by making another surprise site visit.
External Checks
 Micro-lending is character based. MFI must satisfy itself with
client’s character by seeking references. This is done through
external checks.
 Loan officer should speak to:
 At least one supplier and one creditor
 At least one employee
 At least one competitor
 Landlord and Neighbours
 Community leaders
 Money lenders
 Bank (if he has an account and MFI has subscribed to credit
4/8/2024
reference bureau.
Fredynandy M. John (Banking & Fin Svs -IFM) 114
Final Analysis and Loan Structuring
 This is when loan officer should review critical loan
application, appraisal forms, cash flow and make
recommendation to credit manager.

 During this process, cashflow is subjected to rigorous tests

to ascertain its viability.

 Loan structuring refers to process of determining amount

of loan and repayment period, basically from analysis of
customer’s ability to repay (cash flow analysis).
4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 115
Loan Approval
 Depending with the MFI’s organisation structure, when
loan officer completes final analysis s/he submit
recommendation to Credit Manager who may also review
before approving it or forward to credit committee.

 When Credit Manager satisfy himself with analysis of loan

submitted by loan officer s/he must act accordingly.

 When loan is approved, customer should be informed by

giving him letter of offer stating conditions that customer
must abide before being given a loan.
4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 116
Disbursement and Monitoring
 Upon acceptance of the terms, then loan officer will
perform necessary documentation and perfection of
collateral
 Thereafter the loan will be disbursed.
 After disbursement, loan officer will keep on vigilant eye on
the use of loan if at all MFI stipulate condition on the use
of loan and repayments.
 Customer must be given with repayment schedule to
enable him follow through.

4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 117

 - End -

4/8/2024 Fredynandy M. John (Banking & Fin Svs -IFM) 118