Micro-Credit Things to Remember when Borrowing Money Asia/Pacific Cultural Centre for UNESCO (ACCU)
When we need extra money, Micro-Credit can help us. There are several occasions when we need extra money for living, such as... for meeting family needs, for emergency situations, or for expanding family business.
Rashid Rita, I have heard that the co-operative has something called "micro-credit" that can lend us money. Could you tell me what it is? What is Micro-Credit? Rashid and Rajni, who are farmers, have too little money to expand their farming activities. One day, they asked Rita, a member of the farmers' co-operative, for her advice. Rita Micro-Credit means small loans for people who need money for self-employment projects that generate income or for urgent family needs such as health problems and education. It is meant to help improve people's quality of life by lending them a small amount of money for a short period of time. The characteristics of Micro-Credit are... The amount of money you can borrow is not so much. Rajni You need to pay it back in a short period of time, usually within a year at most.
From whom can we borrow? Borrowing from a money lender There are various money lending institutions such as banks, co-operatives, NGOs, and individuals. Since we have two major sources in this village, I will tell you about them, namely individual money lenders and farmers' co-operative. In general, borrowing big money from money lenders is risky. They tend to lend money at high interest (additional money you need to pay), and you have to return big money. While, our co-operative loans to you at much lower interest. Borrowing from a farmers' co-operative Advantages Disadvantages There is no limit on the Interest rate is high. loan amount and borrow- They request collateral * ing period. for securing the loan. Advantages Interest rate is low. A group member may support you if you have diff iculty. No collateral is necessary. Disadvantages There is limit on the loan amount and bor- rowing period. Yo u need to become a member and pay a membership fee. *collateral: Land or other estates to guarantee the repayment of the loan.
Rita, I need some money to buy new seeds and fertilizer for the next harvest. We are thinking of borrowing money from the cooperative. How much do you think I can borrow? How much can we borrow? Rashid, I think it is a good idea to borrow money from our co-operative. They will lend you money at a lower interest rate, compared to money lenders. But, the amount of money you could borrow from our co-operative would be not so big, since you are still new to the co-operative. Besides, you should limit the amount according to the income you expect in the next harvest. You mean that the amount which I can borrow should be set according to my expected income and credibility for paying back? Yes, that is their policy. Once you gain credibility among the co-operative members, they could lend you larger amounts. Rajni, I think we should go to the co-operative office and ask for the "micro-credit".
Before we borrow money Hello, Rashid and Rajni. Welcome to our co-operative! Let me explain the system of our "Micro-Credit". We can lend you up to 1,000 Apees at the interest rate of 2% (2 Apees per 100) per month. The maximum loan period is one year. You may return the loan little by little every month or all at once at the end of the borrowing period. Before you borrow money you should keep three important factors in your mind. They are the principal, interest rate, and schedule of repayment of your loan. Principal -the amount of money you borrow. Interest rate -the percentage of money you need to pay back in addition to the principal. Schedule of repayment - Duration and installment plan of the loan. It affects the total amount of your loan at the end of the borrowing period.
Before we borrow money Terms to remember 1: Interest Rate The interest rate is one important factor that makes a great difference in the total amount of your loan to be paid back. Suppose you borrow 1,000 Apees for one month each from a money lender and the co-operative, let's see the difference in total amount of your loan by the interest rate. Principal Interest Rate per month Amount of Interest Total amount of Loan Rajni, there is such a big difference in the total amount of the loan depending on the interest rate.it seems far better to borrow from the farmers' co-operative. Borrowed from Money Lender 10% 1,000 Apees 100 Apees 1,100 Apees (10 Apees per 100Apees) Borrowed from Farmers' Co-operative 2% (2 Apees per 100Apees) 1,000 Apees 20 Apees 1,020 Apees
Before we borrow money Terms to remember 2: Schedule of Repayment You should decide the schedule of repayment taking the following factors into consideration: [1] when you get income from your product (harvest time) and [2] how much you will get from your harvest. There are two options for a repayment schedule. Option 1: Paying back an installment every week/month Following this option, you pay back regularly little by little and you can avoid risk. Meanwhile, you need to have a regular source of income to cover the payment. Option 2: Paying back the entire amount of loan at the end of the borrowing period Following this option, you pay pack the whole loan at the end of the borrowing period. You need to have a clear vision and plan of paying back all at once.
Before we borrow money Terms to remember 3: 3Cs and Loan Agreement Character "Character" means your honesty and reliability to pay back the loan. It is determined from your previous loan record and personal background. Capacity "Capacity" means how much loan you can comfortably pay back. Your income flow and any legal obligations which may interfere with repayment of the loan are looked into. Capital "Capital" means your current available assets, such as real estate, savings or investment that could be used to pay back the loan if your expected income should be unavailable. Those 3Cs are the criteria that the co-operative apply when we lend money. Besides the 3Cs, please read the Loan Agreement carefully, if it is provided by the co-operative. It should explain all the terms and conditions regarding your loan. Reference: (1) Microcredit, Grameen Bank Home Page (2) The Virtual Library on Microcredit
After we borrow money Terms to remember 4: Ensuring Your Repayment What should I do to ensure the loan repayment? Simply speaking, you try to increase your income and to keep expenditure as low as possible. The following is my advice. If you make the best use of the borrowed money keeping cost-effectiveness in mind and work hard, you can increase agricultural productivity and income. You need to keep a record of money flow on spending and income. Spending includes agricultural equipment and necessities for your daily life, while, income is what you get from selling the products. It is quite helpful to know the market price of your products and the right time for selling. It is also important to keep the marketing cost of your products as low as possible. Whenever you have difficulty in paying your installment, you should imm e d i a t e l y a s k t h e person in charge at the co-operative.
Worksheets Let's try to fill out the following sample worksheets. You will find that the difference of interest rates affects the total amount of payment.beside the sample worksheets, let's try to make your own sheet using actual currency, principal, interest rate, and borrowing period. Suppose you borrowed money under the following conditions: Principal: 1,000 Apees Schedule: paying back equal installment every month for 5 months Worksheet 1 Interest Rate : 4 % (4 Apees per 100) per month Total Interest : 200 Apees (40 x 5 months) Monthly Installment : for Principal -200 Apees for Interest -40 Apees Worksheet 2 Interest Rate : 10 % (10 Apees per 100) per month Total Interest : 500 Apees (100 x 5 months) Monthly Installment : for Principal -200 Apees for Interest -100 Apees Time period 1 st month Principal Interest Installment Cumulative Time period 1 st month 200 40 240 240 Principal Interest Installment Cumulative 200 100 300 300 2 nd 200 40 240 480 2 nd 200 100 300 600 3 rd 3 rd 4 th 4 th 5 th 1200 5 th 1500
Remember when you borrow money Choose a money lending institution which offers low interest rate, such as farmers' cooperative and NGOs. Determine how much you are going to borrow according to how easily you can pay it back. Plan the schedule of repayment suitable to your income plan. Always keep a record of your expenditure and income. Guide for Utilisation This booklet is a prototype version meant for local adaptation. Users are encouraged to modify the contents, reflecting local conditions such as currency, money lending institution, interest rate, borrowing period and repayment schedule. Title: Micro-Credit Things to Remember when Borrowing Money Target: Neo-Literate learners at self-learning level Theme: Knowledge of Micro-Credit Objectives: To raise awareness of key issues about Micro-Credit To let the learners know the safe and wise way of borrowing money To encourage the learners to plan a loan management before and after borrowing money Application: Before distributing the booklet, discuss with learners whether they have experienced lack of money and how they managed the situation. Encourage them to talk about their knowledge and experience with Micro-Credit. Distribute the booklet to the learners and ask them to read through it. Lead a discussion on their findings about Micro-Credit in the booklet. Ask them to fill in the sample worksheets, and to prepare their own worksheet. Illustrated by Eddie B. Handono (Indonesia) Asia/Pacific C Cultural Centre for UNESCO (ACCU) 2000 [6 Fukuromachi, Shinjuku-ku, Tokyo 162-8484 Japan] e-mail: literacy@accu.or.jp URL: http://www.accu.or.jp/litdbase Planned and produced under the Asian/Pacific Joint Production Programme of Materials for Neo-Literates in Rural Areas (AJP) in co-operation with UNESCO Bangkok