▉ Introduction

"Microfinance:Credit Lending Models" is an attempt to document the various models currently being used by microfinance institutions throughout the world.

A total of 14 models are described below. They include, associations, bank guarantees, community banking, cooperatives, credit unions, grameen, group, individual, intermediaries, NGOs, peer pressure, ROSCAs, small business, and village banking models.

In reality, the models are loosely related with each other, and most good and sustainable microfinance institutions have features of two or more models in their activities.

Many of these models are indeed "formalized" versions of informal financial systems. Informal systems have historical precedents that predate modern banking systems. They are still in existence today used mostly by low-income households who do not have access to formal banks. GDRC has developed a continuum of informal credit suppliers that clearly illustrates the link between such informal systems and the models illustrated below.

The models were developed through extensive field work/observations and interviews carried out in India, Thailand, Philippines, Indonesia and Sri Lanka, and includes information from literature as well.

This is where the target community forms an 'association' through which various microfinance (and other) activities are initiated. Such activities may include savings. Associations or groups can be composed of youth, women; can form around political/religious/cultural issues; can create support structures for microenterprises and other work-based issues.

In some countries, an 'association' can be a legal body that has certain advantages such as collection of fees, insurance, tax breaks and other protective measures. Distinction is made between associations, community groups, peoples organizations, etc. on one hand (which are mass, community based) and NGOs, etc. which are essentially external organizations.

Closely related to the group model and similar models.

As the name suggests, a bank guarantee is used to obtain a loan from a commercial bank. This guarantee may be arranged externally (through a donor/donation, government agency etc.) or internally (using member savings). Loans obtained may be given directly to an individual, or they may be given to a self-formed group.

Bank Guarantee is a form of capital guarantee scheme. Guaranteed funds may be used for various purposes, including loan recovery and insurance claims. Several international and UN organizations have been creating international guarantee funds that banks and NGOs can subscribe to, to onlend or start microcredit programmes.

Community Banking model essentially treats the whole community as one unit, and establishes semi-formal or formal institutions through which microfinance is dispensed. Such institutions are usually formed by extensive help from NGOs and other organizations, who also train the community members in various financial activities of the community bank.

These institutions may have savings components and other income-generating projects included in their structure. In many cases, community banks are also part of larger community development programmes which use finance as an inducement for action.

Closely related to the village banking model.

A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise. Some cooperatives include member-financing and savings activities in their mandate.

See the International Cooperative Alliance website for more details.

A credit union is a unique member-driven, self-help financial institution. It is organized by and comprised of members of a particular group or organization, who agree to save their money together and to make loans to each other at reasonable rates of interest.

The members are people of some common bond: working for the same employer; belonging to the same church, labor union, social fraternity, etc.; or living/working in the same community. A credit union's membership is open to all who belong to the group, regardless of race, religion, color or creed.

A credit union is a democratic, not-for-profit financial cooperative. Each is owned and governed by its members, with members having a vote in the election of directors and committee representatives.

The Grameen model emerged from the poor-focussed grassroots institution, Grameen Bank, started by Prof. Mohammed Yunus in Bangladesh. It essentially adopts the following methodology:

More information on Grameen Bank.

The Group Model's basic philosophy lies in the fact that shortcomings and weaknesses at the individual level are overcome by the collective responsibility and security afforded by the formation of a group of such individuals.

The collective coming together of individual members is used for a number of purposes: educating and awareness building, collective bargaining power, peer pressure etc.

The Group model is closely related to, and has inspired, many other lending models. These include Grameen, community banking, village banking, self-help, solidarity, peer pressure etc.

One example of the Group Model is "Joint Liability". When a group takes out a loan, they are jointly liable to repay the loan when one of the group's members defaults on the repayments.

Several resources for the group model can be found in the Capacity Building for Microfinance section.

This is a straight forward credit lending model where micro loans are given directly to the borrower. It does not include the formation of groups, or generating peer pressures to ensure repayment.

The individual model is, in many cases, a part of a larger 'credit plus' programme, where other socio-economic services such as skill development, education, and other outreach services are provided.

Intermediary model of credit lending positions a 'go-between' organization between the lenders and borrowers. The intermediary plays a critical role of generating credit awareness and education among the borrowers (including, in some cases, starting savings programmes. These activities are geared towards raising the 'credit worthiness' of the borrowers to a level sufficient enough to make them attractive to the lenders.

The links developed by the intermediaries could cover funding, programme links, training and education, and research. Such activities can take place at various levels from international and national to regional, local and individual levels.

Intermediaries could be individual lenders, NGOs, microenterprise/microcredit programmes, and commercial banks (for government financed programmes). Lenders could be government agencies, commercial banks, international donors, etc.

Most models mentioned here invariably have some form of organizational or operational intermediary - dealing directly with microcredit, or non-financial services. Also called the 'partnership' model. Specifically see NGOs.

NGOs have emerged as a key player in the field of microcredit. They have played the role of intermediary in various dimensions. NGOs have been active in starting and participating in microcredit programmes. This includes creating awareness of the importance of microcredit within the community, as well as various national and international donor agencies.

They have developed resources and tools for communities and microcredit organizations to monitor progress and identify good practices. They have also created opportunities to learn about the principles and practice of microcredit. This includes publications, workshops and seminars, and training programmes.

See Internet Resources and Networking sections of the Virtual Library.

Peer pressure uses moral and other linkages between borrowers and project participants to ensure participation and repayment in microcredit programmes. Peers could be other members in a borrowers group (where, unless the initial borrowers in a group repay, the other members do not receive loans. Hence pressure is put on the initial members to repay); community leaders (usually identified, nurtured and trained by external NGOs); NGOs themselves and their field officers; banks etc.

The 'pressure' applied can be in the form of frequent visits to the defaulter, community meetings where they are identified and requested to comply etc.

The Grameen model extensively uses peer pressure to ensure repayment among its borrower groups.

Rotating Savings and Credit Associations or ROSCAs, are essentially a group of individuals who come together and make regular cyclical contributions to a common fund, which is then given as a lump sum to one member in each cycle.

For example, a group of 12 persons may contribute Rs. 100 (US$33) per month for 12 months. The Rs. 1,200 collected each month is given to one member. Thus, a member will 'lend' money to other members through his regular monthly contributions.

After having received the lump sum amount when it is his turn (i.e. 'borrow' from the group), he then pays back the amount in regular/further monthly contributions. Deciding who receives the lump sum is done by consensus, by lottery, by bidding or other agreed methods.

See "A Typology of Informal Credit Suppliers"

The prevailing vision of the 'informal sector' is one of survival, low productivity and very little value added. But this has been changing, as more and more importance is placed on small and medium enterprises (SMEs) - for generating employment, for increasing income and providing services which are lacking.

Policies have generally focussed on direct interventions in the form of supporting systems such as training, technical advice, management principles etc.; and indirect interventions in the form of an enabling policy and market environment.

A key component that is always incorporated as a sort of common denominator has been finance, specifically microcredit - in different forms and for different uses. Microcredit has been provided to SMEs directly, or as a part of a larger enterprise development programme, along with other inputs.

Village banks are community-based credit and savings associations. They typically consist of 25 to 50 low-income individuals who are seeking to improve their lives through self-employment activities.

Initial loan capital for the village bank may come from an external source, but the members themselves run the bank: they choose their members, elect their own officers, establish their own by-laws, distribute loans to individuals, collect payments and savings. Their loans are backed, not by goods or property, but by moral collateral: the promise that the group stands behind each individual loan.

The Village Banking model is closely related to the Community Banking and Group models. This model is widely adopted and implemented by FINCA. See their Village Banking Homepage.

Implications and Lessons Learnt

The 14 microfinance credit lending models represent a spectrum of mechanisms that cater to a wide range of social, economic, and institutional contexts. Each model embodies particular strengths and limitations, offering unique lessons and implications for designing responsive and inclusive microfinance programmes. Below is a synthesized set of key implications and learnings:

1. One Size Does Not Fit All
   • Implication: Different communities require different models based on their social cohesion, financial literacy, economic activities, and institutional support.
   • Learning: A flexible, context-sensitive approach is essential. Programmes should begin with thorough needs assessments and may need to blend multiple models to suit local realities.

2. Leverage Social Capital
   • Implication: Models such as Associations, Group, Peer Pressure, and ROSCAs build on trust, mutual accountability, and community networks.
   • Learning: Designing programmes that tap into existing social structures can increase participation, reduce default rates, and strengthen collective responsibility.

3. Institutional Capacity and Sustainability
   • Implication: Models like Cooperatives, Credit Unions, and Community/Village Banks require strong institutional structures and governance mechanisms.
   • Learning: Capacity building, transparent management systems, and community ownership are vital to ensure long-term sustainability.

4. Reach the Unreached
   • Implication: Models like Individual Lending or the NGO and Intermediary Models are especially suited for hard-to-reach or excluded populations who may not yet be ready for group-based lending.
   • Learning: Microfinance must deliberately include strategies to engage women, youth, informal workers, and other marginalized groups.

5. Role of Intermediaries and Support Organizations
   • Implication: The Intermediary and NGO Models highlight the importance of non-financial support, such as training, market access, and financial education.
   • Learning: Credit alone is insufficient. Integrated services?'credit plus'?should be designed to enhance livelihood impact and resilience.

6. Risk Sharing and Guarantees
   • Implication: The Bank Guarantee Model demonstrates the potential of shared risk mechanisms to unlock commercial financing for poor borrowers.
   • Learning: Partnerships with donors, governments, and commercial banks can help de-risk lending and scale up operations responsibly.

7. Informal Models Have Enduring Value
   • Implication: ROSCAs and other informal systems continue to serve low-income populations effectively.
   • Learning: Formal programmes should recognize and possibly formalize or complement informal systems, rather than replace them.

8. Encourage Entrepreneurial Ecosystems<p>
   • Implication: The Small Business Model underscores the connection between finance and enterprise development.
   • Learning: Microfinance programmes should align with broader MSME policies and provide links to markets, infrastructure, and business development services.

9. Build Trust Through Participation
   • Implication: Participatory models like Village Banking empower communities to self-manage financial systems.
   • Learning: Local control and democratic decision-making can enhance transparency, trust, and adaptation to local needs.

10. Scalability Through Hybridization
    • Implication: Many institutions now combine features from several models (e.g., Grameen + Individual lending + Digital platforms).
    • Learning: Hybrid models allow customization and scalability. Combining digital tools with traditional models can increase reach and efficiency.

Toward Better Design

To design better, responsive, and inclusive microfinance programmes, practitioners and policymakers should:

• Understand community dynamics and capabilities before choosing or adapting a model.
• Blend financial and non-financial services tailored to borrower needs.
• Foster local ownership, accountability, and trust-building mechanisms.
• Engage in partnerships across sectors?public, private, and civil society.
• Build adaptive systems that can evolve as communities grow and diversify economically.

Any models missing? Please send an email to the address at the bottom of this page. Future developments of this section will include more models and examples.

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