A microcredit program gives small loans to the poor so that they can procure whatever they need to start a small local business of their choice. A micro-loan of $40-$100, at 1 or 2% interest per month, can empower people to buy some chickens, a loom, a pig or a donkey; an old sewing machine or some rattan; some rice to husk or whatever materials they need to start their small businesses.
In the absence of collateral, the classic Grameen Bank loans are made to groups of five, mostly women, who guarantee each other’s loans. It works like this. If a woman wants to receive a loan and if her idea for a business is accepted, she is encouraged to find four other women and form a group. Then, the first two women are given loans and the others are encouraged to help them make their enterprise a success. After about 6 weeks, if the first two are making their payments on time, the next two women get their loans and six weeks later the last one. All persons who have paid back a first loan, are automatically eligible for a second loan and eventually a third and more so their businesses can grow. At the same time, from the interest, the loan fund is growing, though very slowly, and loans are available to more persons. In some places people pool their loans and later their profit and open a cooperative for growing pigs or corn or chickens. All members of a group are responsible for each other. If one does not pay back one’s loan, no one in the group will receive a second loan until it is paid back. (It may be that the loan pool grows very slowly at these low interest rates because some money is needed for administrative expenses, but as Unus says, this is a not for profit enterprise. Profit will come when the local economy improves and the program grows. In the meantime, an influx of cash from foundations or other sources may be necessary for growth).
To guard against emergencies, such as one’s cow dying and not being able to repay the loan, an emergency fund is set up at the time of the first loan. This simply means that a few coins, perhaps an additional 1/2% of the original loan, is put into an emergency fund. This emergency fund is available on a group vote to bail out the person who had the emergency so that she can repay her loan and not destroy the credit of the group. Most microcredit groups also require savings accounts of all its members. Another 2½% of the original money is withheld in a personal savings account for the borrower. Members have access to the savings when the amount saved exceeds the amount owed, when they retire, or when they leave the program.
Next: Starting a Microcredit Program