Micro Credit Models
by Supplying credit to low-income groups make a match between the quality and quantity of credit and the capacity of the poor to utilize that credit.
Supplying credit to low-income groups make a match between the quality and quantity of credit and the capacity of the poor to utilize that credit. Unlike public sector credit programs and formal bank credit entailing big loans for longer repayment periods carrying low interest rates, micro loans are for short term needs and are made available at market rates to keep the program sustainable. Across the developing world, micro finance institutions are using various credit lending models like,
1 Associations
The associations perform various micro credit functions including savings and support structures for micro enterprises and other work-related issues.
2 Bank Guarantees
Numerous NGOs and UN organizations have been creating international guarantee funds to on lend or start micro credit programs.
3 Community Banking
Have one unit concept, semi-formal and formal credit institutions are established primarily at rural levels to distribute micro finance,
4 Credit Unions: A credit union is a unique financial institution which is organized by members of a particular group to pool their resources jointly. The union lends among its members at below the market rate of interest such schemes have been quite popular in the Sub-Continent.
5 NGOs: Non governmental organizations are playing an important role in the development of micro enterprises across the globe,
Over the years, they have been funding poverty reduction programs at different scales to boost living standard. Most recently, micro finance NGOs have started services for their clients facilitating their access to market funding sources, rather than relying on donor funds. This recognition of the need to achieve financial sustainability has led to the current “financial systems approach” to micro finance. An estimated over 35,000 NGOs engaged in various developmental promotional activities are reportedly operational in Pakistan alone.
6 Islamic Banking: The entrepreneur and the investor share the risk in this model with the condition of using the money productively and efficiently. Islamic banks encourage entrepreneurship, discourage concentration of wealth in few hands and determine the return on actual profit or loss basis. In many loan cases, collateral is not required and emphasis is placed on character of the borrower and viability of the concerned project.
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