Design Features for ensuring high repayment rates on loans
and enabling poor people to access credit
Design Feature Intended Effect 1 Access Methods Means of ensuring that relatively well-off people fo not crowd out others' access to loans Maximun income/assets Direct exclusion of better-off through eg. land-holding ceiling Small loan size Loans are small enough that the better-off are not interested in them. Regular meetings Indirect exclusion of better-off through eg. compulsary attendance at weekly meetings or contribution of physical labour to which the wealthy will not agree. 2 Screening techniques Mechanisms for screening out bad borrowers and projects Market interest rates Encourage loan taking on basis of prospective returns not to capture subsidies Self-selected Prospective members are asked to form groups themselves and hence screen in favour of those they belive will repay; they will also screen proposed loan use. Character reference Alternatively local officials or power structures may be used to approve loan applications 3 Incetives to repay Mechanisms for giving borrowers who have no collateral incentives to repay, or failing this, forcing them to repay Incentive supervision Rregular meetings with extension staff in or near the homes Peer group monitoring Repayment is made in public in front of the group with consequent loss of face if payment is not made Borrower incentives For example, rebates of interest on loans repaid early. Agency staff incentives Agency staff may receive financial bonuses directly related to the repayment performance of their clients Progressive lending Borrowers are able to gain repeated access to loans if they repay and these may also increase in size. Compulsary lending A small amount contributed regularly into a group savings fund provides insurance or collateral for the loans of all group members.
- Adapted from Hume and Mosely (1996), Finance Against Poverty, 2 Volumes London: Routledge.
Quoted in Johson and Rogaly (1997) Microfinance and Poverty Reduction. London: Oxfam.
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