Revolving Funds
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Overview
The idea behind a Revolving Fund is that an organisation (or sometimes an individual) has a reserve of money (the Fund) which is used to lend to one or more borrowers. Over a given period of time, the borrower is expected to repay the original sum that restocks the fund. Usually, an additional sum is charged (interest) to the borrower that acts as a fee for providing the service (administrative costs) and helps to protect the fund from being depleted. Factors contributing to depletion can include inflation, non-payments and the cost to the lender of getting outside finance.
The concept of Revolving Funds is often used in developing countries to provide affordable access to credit for those wishing to borrow money for anything from buying food and productive inputs, to businesses and services.
Differences between formal and informal revolving funds.
The main differences between an informal rotating credit scheme (a co-operative for example) and a formal revolving fund, lies in the source of the initial fund, the scale of lending and the structure of the credit management.
Informal Funds
A co-operative is an example of an informal revolving fund. Informal funds are usually those found in developing countries at the local or community level, in poor areas where access to formal bank credit is virtually impossible. Members of a group put their savings into a commonly held fund, which is then lent to other members when they need a loan. Informal revolving funds do not usually earn any interest, unlike more formal schemes.
An important feature of such schemes is that they depend on social organisation to ensure loans are repaid. Peer or group pressure is a critical aspect of this kind of fund as it is used to ensure repayment, improve understanding between group members and can also be used to strengthen social networks.
Formal Funds
Whilst informal revolving funds are based on community savings, a formal revolving fund usually uses 'seed' money from an outside organisation or agency. The capital fund is managed by a local organisation or NGO and not the community themselves.
The seed money is used to pay for the operational structure (buildings, office equipment and vehicles for example) and also to loan money to many small borrowers. Repayments by the original borrowers over an agreed period of time, puts money back into the fund for other people to borrow. If managed well, revolving funds are an excellent means of making affordable credit available to the poor and – with a small amount of capital – can help benefit many people.
Nota bene: The concept of formal revolving funds has recently been replaced with the concept of micro-finance, which incorporates many different elements of providing small amounts of money to a large number of people.
Revolving Funds – GIZ Reference Projects
- However, we highlight a couple of the projects and sectors here for easy reference:
- Establishment of a micro-finance institution (SOCREMO), Mozambique
- Establishment of a rural micro-finance system, Mongolia
- Renewable Energy for rural households, Philippines
- Promotion of small-holder farmers in bee-keeping, Ivory Coast
- Sustainable Development in the mountain areas of Jiangxi Province, China
- Maintenance of Physical Assets in the Public Health Sector, Philippines
- Promotion of fisheries in Fogo and Brava islands, Cape Verde
- Promotion of sustainable use of natural resources and local economic development (PRORENA), Honduras
- Support for the Establishment of a Decentralized Health System in Himachal Pradesh, India
- Promotion of an integrated social insurance system for women in the informal sector, India
References
