The group approach is not the only way to advance the microfinance system. Failure on the part of MFIs to recognize this fact results to high defaults and high client turnovers. Please be aware.
The group approach is the simplest approach, though, in terms of processes, systems and management. But, knowledge of other approaches widens the horizon for other better choices and facilitates easier ways to adjust to changes within the microfinance sector.
4 Proven Approaches of Microfinance
- Co-0perative Approach
- Financial Association Approach
- Individual Approach
- Village Bank Approach
The cooperative system is considered as one of the oldest systems of microlending. Cooperative as organization is user-owned enterprise providing both savings and credit services to its owners-members. It is also effective in outreach. Cooperatives are slowly catching up to the standard of world-class financial institutions in terms of management and services. So, they are becoming good players in microfinancing.
Financial Associations Approach are village-based systems. These are usually owned and managed by communities, as in the case of cooperatives, that generate their own capital. FAs are more on savings services than credit services. Member gives money in scheduled basis and receives that amount in rotation-basis. The problem with this approach is that of governance and management but it is also good in outreach.
Update: (I was flagged down below (laughs) and I have to clear this out.)
Financial Associations Approach, here, may includes ROSCAs and ASCAs as well as those pre-credit union associations and/or non-government associations that eventually developed into formal lending institutions.
Do not look at these approaches on how they are formed or their purposes but focus on the methods on how they use their capital. Pick up the bests among various methods and start your micro-finance program.
Village Banking Approach is popular in microfinance sector because of Grameen and is similar in a lot of ways to the group lending system. It is more focused to rural areas. This system, like the Financial Associations, is based on the concept of traditional rotating savings and credit associations. Contact with the members happens at a longer interval than in a normal group lending practice.
Individual Approach is almost similar with the traditional formal banking approach in credit delivery. It is slow in outreach and is more effective when a microfinance institute is dealing with individuals who owned medium enterprises.
There are other approaches or innovations to these approaches but, it is better to start with these 4 proven methodologies if you are still starting up. You can mixed them all in your operations, though, if you are already capable of pulling them under the rugs.
However, group lending method is still the simplest in microfinance.
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