CHAPTER 3: LITERATURE REVIEW
3.2 M ICROFINANCE AND M ICROCREDIT
3.2.5 Microfinance Credit Lending Models
Microfinance has different credit lending models all over the world (Srinivas, 2015). This study focuses on the following models among others that are used by microfinance institutions because of their popularity. Further, these models would enhance the
understanding of the credit lending models of Inhlanyelo Fund which is the microfinance considered in this study. The intention of discussing these models is to create a clear understanding on which model(s) the Inhlanyelo Fund utilises when lending money to its beneficiaries.
The credit union model is member driven and comprises members who organise themselves into groups or organisations to save their money and to make small loans to develop their personal projects at low interest rates to improve their lives (Srinivas, 2015). In this model the group members usually live in the same community and sometimes are referred to as self- help groups (Kabeer, 2005).
The cooperative model is an association of people who are united and voluntarily come together through jointly owned and democratically-controlled enterprises to meet their common needs, which may be social, economic or cultural (Ferriera et al., 2017; Srinivas, 2015).
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The individual model is where small amounts of money are given to individuals through standardised agreements where the client assumes the entire liability for repayment.
Individual banking is a departure from the group-based model. In many cases, the individual model is portion of a larger “credit plus” program that comprises other socioeconomic facilities such as, education, skill development and other outreach facilities.
The group lending model supports the loan repayment from marginalised borrowers who act as guarantees because they lack collateral needed by formal financial institutions (Srinivas, 2015). Many other lending models are closely related to, and have been inspired by, the group model. Grameen, community banking, village banking, self-help, solidarity, and peer pressure are examples.
The community banking model treats the whole community as one unit, and establishes semi- formal or formal institutions. Such institutions usually get assistance from NGOs and other organisations which sometimes train them in various financial activities of the community bank. This model has savings components and other income-generating projects included in their structures. They are usually part of community development programmes which use finance as an inducement for action and are closely related to village banking model (Srinivas, 2015).
The village banking model comprises community-based credit and savings associations which typically consist of low-income individuals who seek to improve their lives through self-employment activities. The village banking model was established by NGOs to provide access to financial services, encouraging self-help groups and assist members to accumulate savings. It is connected to the group models and community banking and this makes them similar (Srinivas, 2015).
A ROSCA is a group of people who have agreed to save and borrow money together in a group that combines peer-to-peer lending and peer-to-peer banking (Srinivas, 2015). Stokvels are an example, as well as other types of more traditional credit and savings institutions.
The peer pressure model uses moral and other linkages between borrower and project participation and makes sure that the loan is paid back by borrowers in the group who have participated in the microcredit programmes (Srinivas, 2015). Peers might be other people in the borrowers’ group. Repayment from all members ensures that more members receive loans and vice versa, meaning there is pressure on the initial member to repay back the loan.
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Usually, the people who assist in ensuring the repayments of all members are trained by the institution and such members include community leadership of NGOs, and field officers (Srinivas, 2015).
The Grameen banking model is based on the voluntary formation of groups which are usually more than five members, to provide mutual, morally necessary group guarantees in lieu of the collateral required by the conventional banks (Srinivas, 2015). This model deserves more detailed attention because of its broader influence on microcredit and microfinance (Srinivas, 2015).
3.2.5.1 The Grameen Bank
The Grameen Bank of Bangladesh is one of the country's largest microcredit institutions.
Yunus, the founder of the Grameen Bank, conducted an experiment in a village near Chittagong University in 1976 (Yunus, 1999). He started lending small loans to women without collateral. He noticed that the customers benefited from the credit which helped them to start up their small enterprises, such as weaving bamboo baskets, rice husking, and a variety of other income-generating projects (Yunus, 2003).
The Grameen Bank is an organisation of the Community Development Bank that provides small amounts of money without demanding collateral in order to access loans (Banerjee et al., 2017). This bank has been in the forefront in development agendas, showing potential to reduce poverty by providing credit to poor households and to create opportunities for self- employment. Women who started small enterprises not only earned money for survival and improved their standard of living, but also gained knowledge, establishing their right into the society and country wide (Kabeer, 2017).
The Grameen Bank was awarded the Nobel Peace Prize in 2006 for its millions of loans to the poor. The bank then became Bangladesh's largest provider of microcredit. The Grameen Bank was replicated in many parts of the world and became a global model. The Grameen Bank employs various techniques to bring services to the village level, such as encouraging and motivating underprivileged groups, using group guarantees, and obligatory savings utilization, transparency of credit communications, intensive borrower’s supervision, and decentralized and cost-effective processes (Yunus, 2003). As a result, microcredit is expected to provide numerous opportunities to improve women's lives.
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It is worth noting that another bank on the Indian subcontinent offers microcredit and savings to entrepreneurs, particularly women (Datta, 2003). To avoid corrupt banks, moneylenders, and other middlemen, the Self-Employed Women's Association (SEWA) established its own bank, the Shri Mahila Sewa Sahakari Bank, or SEWA Cooperative Bank, in 1974 (ibid.).
SEWA offers microcredit, or microfinance, to its members through the bank, which many believe increases micro and macroeconomic output by lending to individuals to start
businesses, finance homes, and in a variety of other ways to establish oneself (Datta, 2003).