8. Microcredit in practice

Organizing financial self-help groups

Authors: Peter Futo, Marton Gosztonyi, Mehdi Hasan

Operating rules vary. There are many different practices, which help to build and maintain financial self-help groups. There are no two identical groups; each group is free to decide which are those operating rules that fit for its members. These rules can also be changed later. Before launching a financial self-help group, the following questions have to be clarified.

1. Name. The name of the group is an important symbolic issue and a decision has to be made about it at an early stage.

2. Membership, leadership and management. The following questions relate to membership, leadership and management of the financial self-help group:

· Whether the group is fully managed by its own members, or some external guidance is accepted. As a rule, all leadership and management positions are taken by a member of the group and the posts are transferable. Usually one group member cannot hold more than one position in the group.

· Who and on what conditions can be a member. As a rule, 5 to 20 people are needed, who know each other and trust in each other, who are willing to form a group and are committed to participate in the group's meetings.

· Who and on what conditions can leave the group or be excluded from the group.

· Who will be the mentor or president or manager of the group. As a rule, one person is needed who organizes the group meeting and volunteers to be the mentor of the group. Usually a non-governmental organization’s staff supports the first steps of the group.

· Who will be the group's accountant and what will be his/her tasks. E.g. managing the group's papers: writing down the basic rules and the operational rules of the group, handling the registration papers and the accounts on shares, savings credits, calculating the group's revenues.

· Who will be the group’s cashier or box holder and what will be his/ her tasks. E.g. holding the group's money in a bank account or in a metal box, bringing the necessary amount of money to the meetings.

3. Logistics. The locations where the assets of the group are kept and the decisions are made.

· The "safety infrastructure" of the money kept by the group. As a rule a safe place is created, e.g. a metal cassette with a key. Many financial self-help groups keep their money in banks.

· Location and frequency of meetings, social occasions, events of community decision-making. It is recommended to hold the meetings in the same place, which is suitable for everyone. It can be a public space but also one member’s home as well.

4. Finances. Rules on shares, savings and credits.

· The financial status of the members. As a rule, financial self-help groups work as informal "limited liability companies", i.e. collectives not registered with the authorities. Members buy shares when they enter the group, thus they become owners of the group. The shares build up a fund, which the group can give credits from.

· External funding. Decision has to be made about whether the group is operated only by the members’ savings, or, alternatively, there is some external funding as well.

· How equality of the members is ensured. If decisions are tied to the proportion of shares owned, it is important to determine the maximum number of shares that one member can have.

· Voting rules. How decisions on lending are made within the group. Examples: If the group would like to change its ground rules, how many members should vote with 'yes'. If a group member applies for a loan how many group members have to vote with ‘yes’.

· The origin of the rules of the group. Whether the group members themselves create the rules, or some external rulebook or ready-made guide is adopted.

· Conditions of lending. Who is eligible for short term or long term credit. A possible rule is that a member's credit limit depends on how many shares does she/he have, so it is depends how much money the person had put into the common pot. The loan is not a gift from the group but a credit, which must be paid back to the group. The interest of the loans is also decided by the group (it is typically 1% per month, but it can be 0% as well). The interest is paid monthly together with the installment. The group also decides the maximum credit repayment period and the monthly interest rate.

· Saving. What will be the interrelationship between saving and credit. E.g. whether regular saving is a pre-condition of becoming eligible for credit.

· Credit guarantees. How many guarantors are needed for a credit, who can be a guarantor? The group may decide that all credit taking requires a guarantor.

· Late payment. Whether there is a penalty interest rate. This is important if one cannot pay back the credit installments in time.

5. Insurance-like provisions. Many grassroots organisations show a great deal of solidarity when their members face difficult life situations.

· Whether a saving fund should be established for covering expenditures in case of unexpected events, e.g. illness, death, marriage or childbirth.

· Whether the group can give gift to members in case of emergency or a tragic life event.

Discussion points:

What is the most sensitive, the most difficult question when establishing a financial self-help group? Why?
In what situation, under what conditions would you join a financial self-help group?

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