(Extracted
from Ojijo’s Successful Saccos -
Managers' Guide to Acquire, Retain and Grow Membership, Savings and Assets
& Ojijo's Financial Services Law
Handbook.)
Microfinance is the provision of financial
services to low-income people. It refers to a movement that envisions a world
where low-income households have permanent access to high-quality and
affordable financial services to finance income-producing activities, build
assets, stabilize consumption, and protect against risks.
Initially the term was closely associated
with microcredit—very small loans to unsalaried borrowers with little or no
collateral—but the term has since evolved to include a range of financial
products, such as savings, insurance, payments, and remittances. Poor people
need many kinds of financial products and services and there is a growing range
of organizations working to reach them with savings, insurance, transfers, and
credit services.
Microfinance institutions are legally
registered entities which work to develop products and deliver methods to meet
the diverse financial needs of low-income people. For example, unlike other
forms of lending, microcredit loans use methodologies such as group lending and
liability, pre-loan savings requirements, and the gradually increase in loan
sizes to evaluate clients’ credit worthiness.
Microfinance institutions can be classified
into three major categories, namely:
1. Village Savings and Loans
Associations/Village Banks:
2. Cooperatives (Savings and Credit
Cooperative Societies (saccos) & Multi Purpose Cooperatives)
3. Micro Deposit Taking Institutions (MDIS)
However, in addition to traditional
operators, such as microfinance institutions, credit unions, cooperatives, and
banks, other entities, including mobile network operators, are using technology
to develop new delivery methods to bring these services to the poor, sometimes
in partnership with existing financial institutions.
Village Savings and Loans Associations/Village Banks
Village banking is a microcredit methodology
whereby financial services are administered locally rather than centralized in
a formal bank.
A village bank is an informal self-help
support group of 20-30 members, predominantly female heads-of-household.
The members, mostly women, meet once a week
in the home of one of their members to avail themselves of working capital
loans, a safe place to save, skill training, mentoring, and motivation. Loans
normally start at $50–$100 and are linked to savings such that the more a
client saves the more she can borrow. The normal loan period is four months and
is repaid in weekly installments.
They are run by non-governmental
organizations, registered as such, or as companies limited by guarantee. They
can also be branches of mainstream commercial or retail banks
To eliminate the need for collateral (the
poor man's obstacle to receiving bank loans), village banks rely on a variation
of the solidarity lending methodology. It relies on a system of
cross-guarantees, where each member of a village bank ensures the loan of every
other member. This system gives rise to an atmosphere of social pressure within
the village bank, where the cost of social embarrassment motivates bank members
to repay their loans in full. The admixture of cross-guarantees and social
pressure makes it possible for even the poorest people to receive loans.
Village banks are highly democratic,
self-managed, grassroots organizations. They elect their own leaders, select
their own members, create their own bylaws, do their own bookkeeping, manage
all funds, disburse and deposit all funds, resolve loan delinquency problems,
and levy their own fines on members who come late, miss meetings, or fall
behind in their payments.
Market interest rates apply to village bank
loans. The village bank itself will usually mark up this rate when it on-lends
to individual members. While these rates seem high, they are low compared to
those charged by local moneylenders in most countries. Unlike rural banks and
credit unions these microfinance institutions do not provide savings services
directly to their clients.
Like with other micro finance institutions
such as saccos, small loans are more expensive to process than large ones
because they take longer to process. Without employment history or collateral,
microfinance loans require a more hands-on, time-intensive assessment to
determine creditworthiness. Microfinance institutions (MFIs) usually send a
representative to visit the client as part of this process, making the process
even more challenging and costly in remote or sparsely populated areas. Once a
loan is approved, MFIs often send loan officers to disburse loans and collect
payments in person, which also adds significant expense when compared with the
way traditional banks operate. MFIs have to charge rates that are higher than
normal banking rates to cover their costs and keep the service available.
Micro Deposit Taking Institutions (MDIS)
MDI is an institution regulated by the central bank to
take deposits and offer other banking services. They have reduced capital
requirements, as opposed to commercial or retail banks. MDIs are allowed to take deposits from the
public and on-lend these. They are classified as Tier II institutions. The main
activities of MDIs as the taking of time deposits or savings from the public
and their employment in lending, which can be and is interpreted as the
exemption of deposits from members. Micro Finance Deposit-Taking Institutions
(MDI) Regulations address 1) licensing, 2) liquidity and funds management, 3)
capital adequacy, 4) asset quality, 5) reporting for microfinance
deposit-taking institutions and 6) list of restricted activities.
Ojijo Pascal
Ojijo is the Founder & Lead at GoBigHub.com, the solution to the ever
present cry for youth that they lack capital for doing business. GoBigHub
creates provides a monthly meeting entrepreneurs to meet and pitch to local
institutional and individual investors, as well as business coaching, office
space, and online crowdfunding platform. GoBigHub is leading the move away from
grants, promoting trade, not aid, by offering African entrepreneurs a chance to
get equity funding, with board positions, transparency, and scrutiny to make
sure businesses funded are scalable, and hence, profitably sustainable.
Ojijo has also worked extensively
with collective investment schemes generally (namely, investment clubs and
cooperatives), as a consultant on financial literacy, legal advisory, strategic
planning, and leadership dynamics. In
this area, he has also authored two leading texts on collective investment
schemes, with one on Cooperatives, Successful Cooperatives - Managers' Guide
to Acquire, Retain and Grow Membership, Savings and Assets and one on
investment clubs, Making Money Together -
Ojijo's Investments Club Manual. He sits in bank of Uganda Financial
Literacy Advisory Group/ Financial Literacy Sharing Group (FLISG), and is a
co-founder of Uganda Ministry of Finance sponsored committee of Champions
promoting Investment clubs, Investment
Clubs Association of Uganda-ICAU. He has helped in the training and or
setting up of various cooperatives, including ministry of foreign affairs
cooperative; finance ministry cooperative; NEMA; NARO; Gender Ministry
cooperative, and Nsamizi Institute cooperative (Mpigi), to name but a few.
Ojijo is also a lawyer and guest
lecturer in Financial Services Law, ICT Law, Legal Rhetoric and Law Firm
Management; and a communications
expert specializing in strategic planning, public speaking, and writing skills. He has worked with
various clients including ministry of finance (Uganda); Bank of Uganda;
Ministry of Gender; Technoserve; AIESEC; AYDL; UMYDF; CCEDU; PEDN; Foundation
for Human Rights; several universities, companies, and individuals on personal
branding, financial literacy, business coaching, and entrepreneurship.
Ojijo is an author
of 51 books; Inua Kijana Fellow; Performance Poet’ Armature Pianist; and
entrepreneur owner of luopedia.com, lawpronto.com, naniwapi.com, gobighub.com, allpublicspeakers.com,
bankitgroup.com, and achibela.com.
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