Microfinance Programme: What Works

Oover the past several years, much has been learned in the way of extending credit to the poorest microenterpreneurs. Many of these lessons have been based on concepts long employed by traditional informal finance activities, which are remarkably resilient and flexible to the needs of the client. For example, rotating savings and credit associations (ROSCAs) have long been in existence in Asia, Africa, and Latin America. These groups typically pool members' deposits, then extend loans to members after a given period. Funds can also be disbursed in cases of member emergencies or funeral expenses.

Some of these practices have even made their way to other countries. Acquaintances from immigrant communities form savings groups and accumulate funds which are used to start individual small businesses for each of the members in the new country. These informal sector financial services have supported the entrepreneurial success of many new arrivals in the industrialized world.

Another pervasive feature of the informal sector is pawning, one of the oldest forms of providing money to people who fall outside the reach of formal banks. Pawnshops provide instant small loans for short periods of time, assuring repayment by requiring physical collateral. Village money lenders also provide small loans for short periods of time, unsecured by collateral to people they know well. Their interest rates are much higher than other sources of credit, but they address the specific needs of their clients.

While every project is unique, the "laws" of effective projects which employ the successful elements of financial services as they occur in the informal sector are remarkably similar. These sources possess a significant amount of knowledge and experience in employing lending methods which have endured over time. Main lessons derived from the informal sector, include the following:

UNDP, MicroStart - a Guide for Planning, Starting and Managing a Microfinance Programme [Ver 1.0], 1997.

Hari Srinivas - hsrinivas@gdrc.org
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