SPIS Toolbox - Loan from Micro Financial Institutions (MFIs)

OUTCOME / PRODUCT

Micro Finance Institutions (MFIs) are organizations which provide financial inclusion to the poor strata of the population (excluding the poorest). There are innumerable typologies of organizations acting as MFIs: commercial and development banks, saving groups, cooperatives and NGOs with non-profit status. These institutions can provide micro loans with favourable conditions to the urban and rural poor. MFIs are considered one of the best ways to decrease poverty and enhance development; therefore they most often adopt a development financial model.

Thanks to the spread of internet accessibility and mobile devices amongst the population in developing countries, and due to better access of finance for the poor, micro financing has been booming worldwide.

Due to the variety of profiles of MFIs, it is challenging to define an absolute micro financing model. Usually, non-profit organizations are financed by donors and in order to provide micro credits, they first need to loan money from financial institutions. This double loan system, does not guarantee a constant availability of funds and the interest rate for the final debtor is high. Conversely, classical financial institutions, which decide to enter in the micro financing business, have the advantage to rely on existing infrastructures, the know-how and their own capital. Different than non-profits, which work on local level, formal financial institutions (FIs) lack the physical connectivity to poor people. Therefore, they need to find an alternative way to check the credit worthiness of farmers and to find substitutes for collateral. Furthermore, due to the innumerable transactions and the small amount of money dealt, micro loans barely cover the transaction cost faced by formal FIs.

In general, MFIs offer quick loan disbursement, frequent repayment rates and customized loans, which imply an intensive personal relationship between lender and borrower. Micro financing loans range usually between 4 and 12 months and they need to be repaid either with monthly, weekly or even daily rates. Typical loans from MFIs range between 100 and 300 USD. However, with the entry of for-profit FIs, the loan’s range has increased substantially, allowing farmers to purchase capital intensive farming equipment such as SPIS.

MFIs offer loans both to a single famer as well as groups of farmers. Planting Model Group are established specifically for the purchase of SPIS and allow farmers to obtain higher loans. Group members provide a guarantee for each other: if a farmer fails to repay his debt, the other members are responsible to take it over. Just farmers, who trust each other, are willing to form Planting Model Groups. Similarly, in India, Joint Liability Groups consisting of 4-10 members are formed for the purpose of availing bank loan on individual basis through group mechanism against mutual guarantee. Generally, the members engage in a similar type of economic activity and offer joint undertaking to the bank that enables them to avail loans.

DATA REQUIREMENTS

Due to the variety of the institutions involved in the micro financing business, the requirements that farmers need to meet in order to obtain a micro loan vary considerably. It is therefore necessary to check the data requirements requested by the individual FIs in the other chapters of this module.

Nevertheless a list with the most common documents necessary to obtain a loan are as follows:

• Documents of identification.
  
• Minimum age: 18 years old.
  
• Experience in the sector: normally 1 year requested.
  
• A bank account at the MFI or at another financial institution is required: In order to check the farmer’s cash flow and transactions.
  
• Credit history: Did the farmer pay all his past loans? Is the farmer creditworthy?
  
• Soft collaterals or guarantors.
  
• Insurance on the loan (if applicable).
  
•  A clear purpose of the loan need to be given to the MFI.
• MFIs’ loan are mostly based on human relationship therefore personal interviews need to be conducted.

PEOPLE / STAKEHOLDER

• Micro Finance Institution (MFI)
  
• Farmer or Group of Farmers

IMPORTANT ISSUES

Micro financing allows social inclusion but does not always alleviates poverty, as expected. In fact high interest rates, which on average are around 37% and can reach 70%, can make poor people even worse off.

As commercial banks are more likely to be financial partners of big farmers, so MFIs have mostly SMEs farmers as customers with limited financial means and no collateral. Similarly, Savings and Credit Cooperative Organizations (SACCOs) are owned, managed and run by its members to provide a source of fair loans and reasonable rates of interest.

Sometimes MFIs and SACCOs are confused between each other. Here same main differences between these two institutions:

• From the loan application at a MFI till the loan disbursement just few days pass. SACCOs require instead up to 6 months to pay the loan out.
  
• Interest rate of MFIs are much higher than the one for SACCOs’ members.
  
• The repayment time allowed by MFIs is much shorter.
  
• MFIs are run by paid workers while SACCOs are run by cooperative members.
  
• In SACCOs, debtors are members which share the ownership of the cooperative, in MFIs debtors are clients.