Principles for Sustainable Microfinance Lending

Principle 1: Offer Services that Fit the Preferences of Low-Income Entrepreneurs
  • Give short-term loans
  • Give small loans
  • Give repeat loans
  • Allow relatively unrestricted use
  • Be customer friendly

Principle 2: Streamline Operations to Reduce Costs

  • Highly streamline operations
  • Standardize the lending process
  • Decentralize loan approval
  • Maintain inexpensive offices
  • Select staff from local communities

Principle 3: Motivate Clients to Repay Loans

  • Do not require formal collateral
  • Use character references or group lending with joint liability to motivate repayments
  • Use incentives for prompt repayment
  • Develop a public image that signals seriousness about loan collection

Principle 4: Charge Full-Cost Interest Rates and Fees

  • Recover the costs of the loan. Small loan sizes and personalized service result in costs per loan that require interest rates significantly higher than commercial banks (although significantly lower that informal sector rates).
  • Expect repayment. Low income entrepreneurs have shown a willingness and ability to pay interest rates higher than commercial banks for services that fit their needs.
Source: AMIR Programme - Sustainable Microfinance Initiative

Hari Srinivas -
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