Microcredit programs are aimed at the economically less endowed by providing them with small scale loans. Microcredit programs can be analyzed in more detail when broken down into several variable aspects.
Targets – Who can receive a Microcredit?
The classic idea is that Microcredits ought to help people start small entrepreneurial activities. The believe that only entrepreneurs receive loans is wishful thinking. Especially very small loans, that might be used to bridge a momentary cash shortage, are difficult to monitor. That is why Micro Financial Institutions (MFIs) often already try and pre-select their customers by offering different sorts of products dependent on the individual needs. For example Kompanion offers many different options that range from individual business loans to loans available only for women. There is certain evidence that overall the repayment and impact, financially as well as socio-economically, tends to be larger when loans are directed towards women. However, this may vary between different regions and other factors.
Schemes – Are the loans for individuals or groups?
Credits can either be given out in single liability schemes where loans are given to individuals and small businesses directly or in a joint liability scheme where a group of people receives a loan. In the second case the loan goes to a group in which the individuals serve as a guarantors for the other member’s repayment. The idea that social pressure can increase the security of loans depends on the cultural background of the region and the connection between the individuals. The group schemes were in part introduced as a result of missing collaterals.
Collateral – Is security needed or not?
A collateral is a security in the form of a tangible asset like a house or raw materials that the borrower needs to pledge for receiving a loan. In case of a default, the financial institution can then possess the collateral and sell it to receive part of their money back. Many MFIs do not require a collateral for loans or at least some of the loan-products they offer. An example is Finca in Georgia.
Repayment – How do borrowers pay back?
There are a variety of ways in which micro loans can be repaid. Variables of the repayment design include amount of time between payments, the interest rate, and the amortization schedule. On the other side there are some ways in which the financial institution can influence the process. Elements here include the strictness of the schedule, the place and method by which a debtor can pay back – electronical or rather in cash in one main office – as well as including a reminder before repayment in the form of a text message. Some institutions include incentives in their customer’s’ repayment schedule. An example is that if a debtor manages to always pay on time over the time of the scheme a cash back is included.
How are microloans monitored? How are collateral assets evaluated? How high are the microcredit interest rates? How risky are non-collateral loans?