Microcredit, or microfinance, is banking the unbankables, bringing credit, savings and other essential financial services within the

reach of.millions of people who are too poor to be served by regular banks, in most cases because they are unable to offer sufficient collateral. In general, banks are for people with money, not for people without. (Gert van Maanen, Microcredit: Sound Business or Development Instrument, Fundamentals of microfinancing The managers at the MFIs are careful to ensure the borrower success and informs about the risks involved, that makes in general the borrower performing better. This leads often to earned dignity and lasting self-confidence associated with responsible loan repayment. To have a sustainable growing economy it takes high entrepreneurship and energy in order to develop the world and fight poverty. Independet and responsible entrepreneurs are valuable resources which can take advantage of the microfinance industry. They will not take big risks and must be supported by predictable financing. Normal bankoperations suits better to large transactions which is more profitable, the traditional operating philosophy is to invest in facilities and they have costly operating structures. The traditional financing industry must either change themselves or stay out of the microfinance business. A new generation of banking institutions is growing in a market of very small transactions and less affluent clients. With lowered transactions costs through institutional specialization and innovation in delivery systems, they will be able to operate profitable in this market serving the poor with financial services. The poor entrepreneurs are the future representing the population who will become successful in the nearby future. They have the same will and skills as the toughest business operators. The are economical, dont take big risks and repay debts as scheduled to maintain possibility borrowing money in the future. This require a totally new ground breaking banking system with scale economics. Modifying the standard system will simply not be enough, the poor people will continue stay outside their countrys economy. Building up microfinance institutions serving poor people is a relatively costeffective use of subsidies for economic development compared to other supporting strategies for welfare.

Funding / Financial Institutions The mission for the funding institutions is to help MFIs operating more efficiently and be more effective. They provide each partner with financial products and services that are tailored to meet their needs. A goal is to ensure the partners are moving their clients out of poverty and to foster good practices for measuring the progress of the individuals movement across poverty lines. MFIs must show results, yet many do not have the tools to evaluate how well they are fulfilling their mission of reducing poverty, reaching people excluded from financial services, empowering women, or promoting community solidarity. Thats why they should also equip microfinance institutions with tools to measure their clients progress out of poverty. Built on the learnings of previous efforts in the microfinance industry they can develop the operational methods in reaching the clients. Innovative financing solutions and strategies to expand the capacity and efficiency of the MFIs provide a direct impact on the lives of the poor, and advancing the microfinance industry as it moves toward even higher standards in terms of anti-poverty impact and financial performance. History of microfinance The history of microfinancing can be traced back as long to the middle of the 1800s when the theorist Lysander Spooner was writing over the benefits from small credits to entrepreneurs and farmers as a way getting the people out of poverty. But it was at the end of World War II with the Marshall plan the concept had an big impact. The today use of the expression microfinancing has it roots in the 1970s when organizations, such as Grameen Bank of Bangladesh with the microfinance pioneer Mohammad Yunus, where starting and shaping the modern industry of microfinancing. Another pioneer in this sector is Akhtar Hameed Khan. At that time a new wave of microfinance initiatives introduced many new innovations into the sector. Many pioneering enterprises began experimenting with loaning to the underserved people. The main reason why microfinance is dated to the 1970s is that the programs could show that people can be relied on to repay their loans and that its possible to provide financial services to poor people through marketbased enterprises without subsidy.

Shorebank was the first microfinance and community development bank founded 1974 in Chicago . An economical historian at Yale named Timothy Guinnane has been doing some research on Friedrich Wilhelm Raiffeisens village bank movement in Germany which started in 1864 an by the year 1901 the bank had reached 2million rural farmers. Timothy Guinnane means that already then it was proved that microcredit could pass the two tests concerning peoples paybackmoral and the possibility to provide the financial service to poor people. Another organization, The caisse populaire movement grounded by Alphone and Dorimne Desjardins in Quebec , was also concerned about the poverty, and passed those two tests. Between 1900 to 1906 when they founded the first caisse, they passed a law governing them in the Quebec assembly , they risked their private assets and must have been very sure about the idea about microcredit. Today the World Bank estimates that more than 16 million people are served by some 7000 microfinance institutions all over the world. CGAP experts means that about 500 million families benefits from these small loans making new business possible. In a gathering at a Microcredit Summit in Washington DC the goal was reaching 100 million of the worlds poorest people by credits from the world leaders and major financial institutions. The year 2005 was proclaimed as the International year of Microcredit by The Economic and Social Council of the United Nations in a call for the financial and building sector to fuel the strong entrepreneurial spirit of the poor people around the world. The International year of Microcredit consists of five goals: Assess and promote the contribution of microfinance to the MFIs Make microfinance more visible for public awareness und understanding as a very important part of the development situation The promotion should be inclusive the financial sector Make a supporting system for sustainable access to financial services Support strategic partnerships by encouraging new partnerships and innovation to build and expand the outreach and success of microfinance for all

The economics professor Mohammad Yunus and the founder of Grameen Bank were awarded the Nobel Prize 2006 for his efforts. The press release from nobelprize.org states: The Norwegian Nobel Committee has decided to award the Nobel Peace Prize for 2006, divided into two equal parts, to Muhammad Yunus and Grameen Bank for their efforts to create economic and social development from below. Lasting peace can not be achieved unless large population groups find ways in which to break out of poverty. Micro-credit is one such means. Development from below also serves to advance democracy and human rights. Muhammad Yunus has shown himself to be a leader who has managed to translate visions into practical action for the benefit of millions of people, not only in Bangladesh , but also in many other countries. Loans to poor people without any financial security had appeared to be an impossible idea. From modest beginnings three decades ago, Yunus has, first and foremost through Grameen Bank, developed micro-credit into an ever more important instrument in the struggle against poverty. Grameen Bank has been a source of ideas and models for the many institutions in the field of micro-credit that have sprung up around the world. Every single individual on earth has both the potential and the right to live a decent life. Across cultures and civilizations, Yunus and Grameen Bank have shown that even the poorest of the poor can work to bring about their own development. Micro-credit has proved to be an important liberating force in societies where women in particular have to struggle against repressive social and economic conditions. Economic growth and political democracy can not achieve their full potential unless the female half of humanity participates on an equal footing with the male. Yunuss long-term vision is to eliminate poverty in the world. That vision can not be realised by means of micro-credit alone. But Muhammad Yunus and Grameen Bank have shown that, in the continuing efforts to achieve it, micro-credit must play a major part. Micro Financial Institutions Poverty is the main cause of concern in improving the economic status of developing countries. A microfinance institution is an organization that offers financial services to low income populations. Almost all give loans to their members, and many offer insurance, deposit and other services.

A great scale of organizations is regarded as microfinance institutes. They are those that offer credits and other financial services to the representatives of poor strata of population (except for extremely poor strata). Microfinance is increasingly being considered as one of the most effective tools of reducing poverty. Microfinance has a significant role in bridging the gap between the formal financial institutions and the rural poor. The Micro Finance Institutions (MFIs) accesses financial resources from the Banks and other mainstream Financial Institutions and provide financial and support services to the poor. MFIs are the pivotal overseas organizations in each country that make individual microcredit loans directly to villagers, microentrepreneurs, impoverished women and poor families. An overseas MFI is like a small bank with the same challenges and capital needs confronting any expanding small venture but with the added responsibility of serving economically-marginalized populations. Many MFIs are creditworthy and well-run with proven records of success, many are operationally self-sufficient. Various types of institutions offer microfinance: credit unions, commercial banks, NGOs (Nongovernmental Organizations), cooperatives, and sectors of government banks. The emergence of for-profit MFIs is growing. In India , these for-profit MFIs are referred to as Non-Banking Financial Companies (NBFC). NGOs mainly work in remote rural areas thereby providing financial services to the persons with no access to banking services. The term transformation, or commercialization, of a microfinance institution (MFI) refers to a change in legal status from an unregulated nonprofit or non-governmental organization (NGO) into a regulated, for-profit institution. Regulated, transformed organizations differ from nonprofits in that they are held to performance and capital adequacy standards and are supervised by a financial authority, typically the central bank of the country where they are registered. A transformed MFI also attracts equity investors. The equity investors want to ensure that the values of their investments are maintained or enhanced and elect Board members who share a common vision for the new for-profit institution. Among transformed MFIs, varying classifications of regulated institutions exist, the strictest being banks rural banks and thrift banks followed by non-bank financial institutions. Different countries have varied names for these regulated MFIs.

The microfinance sector consistently focuses on understanding the needs of the poor and on devising better ways of delivering services in line with their requirements, developing the most efficient and effective mechanisms to deliver finance to the poor. Continuous efforts towards automation of operations is steady improving in efficiency. The automated systems have also helped accelerate the growth rate of the microfinance sector. The goal for MFIs should be: To improve the quality of life of the poor by providing access to financial and support services; To be a viable financial institution developing sustainable communities; To mobilize resources in order to provide financial and support services to the poor, particularly women, for viable productive income generation enterprises enabling them to reduce their poverty; Learn and evaluate what helps people to move out of poverty faster; To create opportunities for selfemployment for the underprivileged; To train rural poor in simple skills and enable them to utilize the available resources and contribute to employment and income generation in rural areas. Many institutions practice microfinance, or raise funds for microfinance, including the following: Accion International ACDI/VOCA BRAC Enterprise Development International Five Talents International Freedom from Hunger Grameen Foundation Kiva Microfinance in Uzbekistan Microloan Foundation Microcredit Summit Campaign

Microenterprise Access to Banking Services Omidyar-Tufts Microfinance Fund Opportunity International Australia ShoreBank Tameer Microfinance Bank Ltd Unitus World Council of Credit Unions XacBank SKS

Microfinance industry structure

Microfinance products Offering financial services to poor people in developing countries is expensive business. The cost is one of the biggest reasons why traditional banks dont make small loans, the resources requierd for a 50$ loan is the same as for a 1000$ loan. MFIs also have big personnel and administration costs. Field staff managers must perform village surveys before entering a village, conduct interviews with potential borrowers, educate the borrowers in credit discipline, travel to the villages every week to collect interest and distribute loans and control that the loans are being used for the given purpose. The microcredit loan cycles are usually shorter than traditional commercial loans with terms from typically six months to a year with payments plus interest, payed weekly. Shorter loan cycles and weekly payments help the borrowers stay current and not become surprised by large payments. Clearly the transaction-intense nature of weekly payment collections, often in rural

areas, is more expensive than running a bank branch that provides large loans to economically secure borrowers in a metropolitan area. As a result, MFIs must charge interest rates that might sound high. In order to be able to lend out money, the microfinance institutions must in addition borrow from the traditional finance sector with commercial perspective. Theres always about 1-2% loss on loans due to people not paying back. To be able to expand business the MFIs must also make some profit, at least 1-2%. All in all its easier to understand why the MFIs charge their customer interest rates which in first sight might appear high. With a growing market, better economics of scale and increasing efficiency the cost will reduce and lower interest rates are able. For a financial institution to scale and remain sustainable, at a bare minimum it has to cover its costs. A large bank can charge lower rates in order to recoup its costs. Because of smaller loan size and more transactions, the MFI has to charge higher minimum rates. Data from the MicroBanking Bulletin reports that 63 of the worlds top MFIs had an average rate of return, after adjusting for inflation and after taking out subsidies programs, of about 2.5% of total assets. This lends to the hope that microfinance can be sufficiently attractive for investors, as well as the mainstream in the retail banking sector. Typical microcredit products look like this (the numbers are only hypethetical): Product Income Generation Loan (IGL) Mid-Term Loan (MTL) Emergency Loan (EL) Individual Loan Purpose Terms Interest rate

Income generation, asset development Same as IGL, available at middle (week 25) of IGL All emergencies such as health, funerals, hospitalization Income generation, asset

50 weeks loan paid weekly 50 weeks loan paid weekly

12.5% (flat) 24% (effective) 12.5% (flat) 24% (effective)

20 weeks loan

0% Interest free

1-2 years loan

11% (flat) 23%

(IL)

development

repaid monthly

(effective)

The Income Generating Loan is used for a variety of activities that generate income for their families. Clients submit a loan application and based on approval receive the loan after one week. Loans are paid in 50 equal, weekly installments. After completion of a loan cycle, the client can submit a loan application for a future loan. The approach with smaller short-term loan is to avoid long-term economic problems with bigger loans. The Mid Term Loan is available to clients after 25 weeks of repaying their IGL loan. A client is eligible for a MTL if the client has not taken the maximum amount of the IGL. The residual amount can be taken as a MTL. The terms and conditions of the MTL are otherwise exactly the same as IGL. The Emergency Loan is available to all clients over the course of a fiscal year. The loan is interest free and the amount and repayment terms are agreed upon by the MFI and the client on a case by case basis. The amount is small compared to the income generating products and is only given in times of dire need to meet expenses such as funerals, hospital admissions, prenatal care and other crisis situations. The Individual Loan is designed for clients and non clients that have specific needs beyond the group lending model. Loans are given to an individual outside of the group lending process. Amounts are typically higher than that of the income generating loan and repayments are less frequent. Applicants must complete a strict business appraisal process and have both collateral and a guarantor. Microfinance is not panacea from all troubles, this also means that not any poor person can obtain the loan. In particular, representatives of very poor population, lacking stable income, living by means of chance earnings, and particularly having debts (in relation to community facilities, relatives, friends, etc) cannot be clients of microfinance, since in case of microcredit non-repayment they will have more debts, becoming poorer. For such people special programs of social assistance are needed, which are able to support main needs of people living in the poorest dwellings, lacking garments and food. There is some restrictions regarding what the money is used for. Usually micro credits cant be used for the purposes like:

Payments of other loans or other debts; Production of tobacco and liquor; Forming turnover capital of trade and intermediary business; Organization or purchasing products for gambling or entertainment services for the population; Establishing trading points; Purchase of property thats not used for business. In the microfinance sector theres other services expanding as well. The poor need, like all of us, a secure place to save their money and access to insurance for their homes, businesses and health. Microfinance institutions are now innovating new products to help meet these needs, empowering the worlds poor to improve their own lives. Products common used in the microfinance sector today is:

Micro savings A possibility to save money without no minimum balance. Allows people to retain money for future use or for unexepected costs. In SHGs the members save small amounts of money, as little as a few rupees a month in a group fund. Members may borrow from the group fund for a variety of purposes ranging from household emergencies to school fees. As SHGs prove capable of managing their funds well, they may borrow from a local bank to invest in small business or farm activities. Banks typically lend up to four rupees for every rupee in the group fund;

Micro insurance Gives the entrepreneurs the chance to focus more on their corebusiness which drastically reduces the risk affecting their property, health or workingpossibilities. The is different types of insurance services like life insurance, property insurance, healt insurance and disability insurance. The spectrum of services in this sphere is constantly expanded, as schemes and terms of providing insurance services are determined by each company individually;

Micro leasing For entrepreneurs or small businesses who cant afford buy at full cost they can instead lease equipment, agricultural machinery or vehicles. Often no limitations of minimum cost of the leased object;

Money transfer A service for transferring money, mainly overseas to family or friends. Money transfers without opening current accounts are performed by a number of commercial banks through international money transfer systems such as Western Union , Money Gram, and

Anelik. On the surface they may seem like small money transfers, but when one considers that such transactions take place millions of times around the world each week, the numbers start to become impressive. According to the World Bank, the annual global market for remittances money transferred home from migrant workers is around 167 billion US dollars. The estimated total is closer to 230 billion dollars if one counts unregulated transactions. Remittances are also an important source of income for many developing countries including India, China and Mexico, all of which receive over 20 billion dollars each year in remittances from abroad.

Microfinance In this category youll find posts related to microfinance and news in the field of microfinance. Support microfinanceinfo.com Tue, 9 Mar 2010 | Published in Microcredit, Microfinance Thank you for reading our articles and following the blog about microfinance and microcredit. This website started as a project in the university when I studied in Germany, and is now a big source of microfinanceinformation with many visitor from all around the world. Its quite obvious, microfinance is something that really brings the world together to cooperate for a better and sustainable future. There is so many people needing financing to get up on [...] No Comments | Read More Better late than ever, start lending today Tue, 2 Mar 2010 | Published in Kiva.org, Microfinance Ive been talking earlier about Kiva.org as a channel between funds, microfinance institutions and entrepreneurs. And finally im also a proud lender, one hour ago i started with a small loan of $25 to a group working with animal sales in Uganda! Its a big group of entrepreneurs that wants to expand their business in selling goats, i wish them luck and hopefully their complete loanrequest is raised soon. No Comments | Read More

Microfinancing foreign currency exchange Wed, 27 May 2009 | Published in Capital Markets, Microfinance Microfinance typically refers to various kind of small loans, savings, money transfers and other kind of financial services targeted to low-income clients. Now, as the market for microfinancing mature, there are new options also for foreign currency exchange which often been pointed out as a big risk factor. Mini Foreign currency exchange Recent studies show that currency risk is one of the biggest challenges for microfinancing. If the loans are taken in USD, which is [...] 4 Comments | Read More Give your signature Sat, 4 Oct 2008 | Published in Microcredit, Microfinance A lot of people are living under poverty, but with microfinance they have the chance to lift themselves out of poverty. Microfinance provides financial resources like loans, savings, insurances and business training to help people build businesses. Oktober 17th is the International Day for the Eradication of Poverty. The UN secretary-general Ban Ki-Moon is going to perform a speech that day. Wouldnt it be good if the focus in his speech was on microfinance as [...] No Comments | Read More Accion have released their annual report for 2007 Wed, 30 Jul 2008 | Published in Microfinance Accion is illustrating poverty fighting strategies, what they are doing now and what are planning to do later in their report for 2007. They write about the problems of the microfinance world and how to solve them. Download the annulal report here if you are interested in microfinance and microcredit. 2 Comments | Read More Voices from the field Thu, 6 Mar 2008 | Published in Microfinance

On the Accion webpage you can find videos that presents the work in bringing financial services to the poor. The videoclips are from areas in the U.S., Peru, Uganda and Tanzania. You find introduction videos, a how to set up MFI-video, microentrepreneus telling their story and about the partners in the microfinance industry. Here you find the microfinance videos. No Comments | Read More In times when stockmarkets are falling Tue, 19 Feb 2008 | Published in Capital Markets, Microfinance Almost everywhere around the world the stockmarkets have been falling in the last time, due to things like banks loosing money in subprime loans. But not everything are loosing value nowadays. The microfinance industry is developing and more traditional financial institutions are opening their eyes for microfinance because they starts to see the huge opportunities. Investing in microfinance and helping people start busiensses means profits for both the lender and borrower. Its a stable and [...] No Comments | Read More The Asian Development Bank will fund banking services in Vanuatu Mon, 11 Feb 2008 | Published in Microcredit, Microfinance, Technology Vanatau belongs to the poorest countries of the pacific areas. Many people are out of reach of modern and secure banking services in the rural areas of Vanuatu. Some people that are employed by the government must make long trips to the nearest branch of the National Bank of Vanuatu (NBV) to deposit their salary in the bank. Some farmers are even hiding their money by burying it in the ground rather than going the [...] No Comments | Read More S&P and IDB are setting up global rating system for MFIs in Latin America Thu, 7 Feb 2008 | Published in Capital Markets, Microcredit, Microfinance The Inter-American Development Bank(IDB) sponsors a new pilot rating program in Latin America set up by S&P to improve the infrastructure of microfinance institutions for national capital markets. S&P and IDB are cooperating in this project with the aim to gain acccess to the

capital markets for the MFIs. Standard&Poors involvement is a breakthrough in the microfinance industry, S&P talks the same language as investor and their benchmarking tools really opens up the capital markets [...] No Comments | Read More How you can get into microfinance with Kiva.org Wed, 6 Feb 2008 | Published in Kiva.org, Microfinance Kiva.org connects you to specific business somewhere in the developing world where microfinance is needed. Kiva.org is listing all businesses whos connected to a microfinance institution joining the Kiva program. By lending out as little as $25 to a business you can make huge impact and help them getting economic stable. Usually the loan is repaid between 6-12 months and you receive journals from the business youre sponsoring. A microfinance institution is called field partner [...] 1 Comment | Read More Using IT and technology to reach scale A key factor to be more successful in scaling the microfinance industry efficient is to use the power of IT technologies which already thousands of MFIs recognized. Technology is essential to reach new peope, controlling risks make the business sustainable and more effective due to the costs. With mobile phones, ATM machines and other new innovations the possibilities are unlimited to provide financial services more efficient to poor people. Once improved the technology more unbankable are reached. Despite the big potential, there are still not enough MFIs reaching scale. Access to affordable telecommunications simply does not exist for millions in the developing world. For some, placing a phone call can require traveling over six miles from their homes. This

can mean leaving work and losing out on desperately needed income. Cut off from easy access to communications, these communities are at both an enormous economic and social disadvantage.

Point Of Sale (POS) terminals can be computers, bank card readers or even mobile phones. Already many MFIS are using those tools to conduct business with their clients. POS terminals enables money transfers, bank transactions from balance inquiries, bill and loan payment, cash withdrawal and deposits. Using POS terminals Is much more cheaper than building brick and mortar branches everywhere in order to reach the huge demand. Although they need staff to operate the terminal, its cheaper than staff a bankoffice. The technology is already something we can use today, it does not have to be innovated. The mobilephone is the most used tool today, villages that dont even have a telephone line now can be reached. Thats why the most applications for microfinance also are innovated to work together with mobilephones. Solarenergy systems are developed to charge the mobilephones in the villages where they even lack traditional power grid. ACCION International are using a system called PortaCredit and the Mifa system innovated by Grameen aiming to make heavybusiness transactions to clients cost less and be more efficient. While the client always in the end have to pay for all costs, microfinance need to bring costs down even though its enabling and empowering with personal contact with the clients. Their time has to be used effective to improve the process. MFIs want to provide their financial services to clients with the same quality of products and services that clients receive from other service providers. When putting together microfinancial knowledge and technological knowledge, two different branches, a totally new area of innovations can arise creating new business opportunities. Its also about helping the individuals to understand the power of technology and how they can benefit from it.

Weaknesses and strengths Weakness Theres not much research done on the actual effectiveness of microfinance as a tool for economic growth. Some argue that theres to much focus on microfinance which will motivating less spending in other helping assistances as public health, welfare, and education. Some are doubting microfinance really have that impact on poverty as the practioners would submit. Other describes microcrediting as a privatization of public safetynet programs. Theres also some microfinance institutions charging excessive interest rates. Questions against the Grameen Bank was raised in a Wall Street Journal article. It was regarding the repayment rate, collection methods and questionable accounting practices. Studies of microcredit programs have found that women often act as collection agents for their husbands and sons, such that the men spend the money themselves while women are saddled with the credit risk. Some borrowers have become dependent on loans for household expenditures rather than capital investments. The key debate about microfinance is weather it should focus on improved welfare or financial sustainability. The two different approaches are usually named as poverty lending or the welfarist approach and the institutionist approach or financial system approach. The welfarist approach could be for example supplying the customer with education and health wilst the institutionists focus only on the financial service. The reason for that is only with total focus on financial sustainability the huge demand can be met. MFIs with the welfarist approach are for example the Grameen Bank and Womens World Banking. Examples of institutionists are ACCION International and BRI Unit Desa. Strength The biggest strength is bringing financial services to poor people and making it financial sustainable by the economies of scale effect. In India the National Bank for Agriculture and Rural Development (NABARD) finances more than 500 banks that onlend funds to self help groups (SHG). SHGs comprise twenty or fewer members, of whom the majority are women from the poorest castes and tribes. Nearly 1.4 million SHGs comprising approximately 20 million

women now borrow from banks, which makes the Indian SHG-Bank Linkage model the largest microfinance program in the world. Similar programs are evolving in Africa and Southeast Asia with the assistance of organizations like Opportunity International, Catholic Relief Services, CARE, APMAS and Oxfam. Also helps in the development of an economy by giving everyday people the chance to establish a sustainable means of income. Eventual increases in disposable income will lead to economic development and growth. Wordlist and sources

List of words NGO = Non Government Organization MFI = Micro Finance Institution SHG = Self Help Group CGAP = The Consultative Group to Assist the Poor NBFC = Non Banking Financial Company IGL = Income Generation Loan MTL = Mid Term Loan EL = Emergency Loan ILP = Individual Loan Sources Working method for microfinance institutions The Grameen Bank of Bangladesh has developed a joint liability model that its MFIs are using suited for local conditions. When choosing a village the MFI conduct a comprehensive survey to brief the potential for operations and the local conditions in a village. The MFI are evaluating some key factors like village population, degree of poverty, road accessibility, political stability and safety. When a village has been selected, the MFI introduces its mission, methodology and the services they are offering.

After the informational presentation interested women are gathered in group formations. They have to be in the age between 18 and 59. The women put them self together in groups of five to serve as guarantors for each other. Earlier experience has shown that a group of five persons is small enough to create group pressure between the members, enforcing them to be loyal to each other. In case someone of the group members are not able to repay the loan the group is big enough to help with the payments. The company does not influence the selection of group members nor the decision regarding the income generation activity nor the loan amount they intend to take. Group members must live close to each other and cannot be related to each other. If a borrower defaults on her loan, the entire group typically is penalized and sometimes barred altogether from taking further loans. This peer pressure encourages borrowers to be very selective about their peer group members and to repay loans in full and on time. Then the group training begins, usually as a five day program. The purpose is to educate the members in the procedures of the financial products, delivery methods, calculation of interest rates, business development skills and how to sign their names. The members are also taught in quality management, to identify an income generation activity, how to set prices and how to market. They field staff also build a culture of credit discipline and collective responsibility. The field staff makes sure the members qualifies for the program and collect data for future analysis. Within the village, a center is created collecting the groups. The center is responsible for the payments of all groups, enabling a dual liability system. When the villagecenter is created the financial transactions can begin. The groups meet weekly in the villagecenter where they can discuss new loan applications, loan utilization, and community issues. The field staff of the MFIs conduct the meetings with rigid discipline in order to sustain the credit discipline of the group. All financial transactions are conducted during the meetings. Microfinance is a relatively new segment of the market economy that is why institutions created in this segment have short experience in their activities, and their personnel is not sufficiently

experienced and qualified. Taking this into consideration, staff of these institutes is recommended to follow the internationally recognized principles of microfinance:

thorough examination of potential clients of the microfinance institution; thorough estimation of business viability and also factors which can positively or negatively affect the results of work in specific conditions;

thorough registration of documents and contracts related to loan issuance and microfinance services providing;

keep in touch with client in combination with monitoring of the terms of paying a credit, interests payments and with the aim to find out potential and real problems;

setting of interest rates for microfinance services compatible with market ones; quick reaction to any problems which can complicate the perspectives of getting of issued credit payed back.