microcredit toolkit introduction

microcredit toolkit introduction

Contents Microcredit: A powerful tool in your hands 2 Vancity s Peer Lending Program 2 How does a Peer Lending Program work? 3 The Microcredit Toolkit: A way to share our know-how with the community 5 Components of a Peer Lending Microcredit Program 6 The contents of the Toolkit 7 Key success factors 8 Getting started 9 Key questions an organization should ask before starting a Peer Lending Program 10 Appendix 1: List of sample tools on CD-ROM 11 Appendix 2: Resources and information on Microfinance and Microcredit 11 1

Microcredit: A powerful tool in your hands Microcredit is an international movement that began more than 30 years ago in the developing world. It initially involved providing people living in poverty with access to small amounts of credit to develop or expand their businesses. Since that time, the movement has grown into microfinance which includes: microcredit (lending money to low-income people for a variety of purposes), microsavings (supporting low-income people to save and invest money) and microinsurance (providing low-income people with access to insurance for a variety of needs). Today microfinance is a powerful tool for the elimination of poverty in the industrialized world, including North America and Europe. The idea behind microfinance and behind microcredit, the focus of this toolkit is simple: give people a hand up, not a hand out. In Canada, microcredit has been used by innovative organizations focused on poverty reduction and community economic development as a way to help low-income Canadians break the cycle of poverty and build economic self-reliance. As the movement builds and expands in Canada, a number of different models have been developed. All are having the same results: people changing their lives for the better in permanent ways. Our Statement of Values and Commitments ensures that we will lead by example and use our resources and expertise to effect positive change in our communities and, at the same time, help our members achieve their financial goals. As part of that commitment, we work to ensure access to financial services, including credit, for all members of the communities in which we live and work. Building on the international microfinance movement, Vancity s Peer Lending Program was created in 1998 as one model to deliver microcredit to low income entrepreneurs, including new immigrants, who lacked access to conventional credit. As part of our efforts to expand this model in the community, not to mention honouring the United Nations International Year of Microfinance in 2005, we developed this toolkit. It contains a user guide and set of resources to allow any non-profit organization to develop the skills and expertise to deliver this peer lending model of microcredit to their client group. Vancity is proud to make this toolkit available to the wider community. We want to make a difference in the lives of low-income Canadians, helping them build economic self-reliance and change their lives for the better. Vancity s Peer Lending Program We recognize that small businesses are a rapidly increasing part of the economic scene in Canada. We also recognize that such micro-enterprises are an important way of promoting entrepreneurial initiative and economic self-reliance. The truth is, however, that access to credit for small entrepreneurs is very often hard to get. Low income earners, people with physical or mental challenges, newly arrived immigrants and refugees, and many others require innovative, business-oriented programs that are flexible and serve their needs. This is where we can help. We set up the Peer Lending Program to offer an alternative to traditional sources of business credit for budding entrepreneurs. No collateral, no personal credit history, no full-time employment - those are the standard barriers people face when trying to secure loans from other lending institutions. But we don t think these barriers are fair to hardworking, enthusiastic people who have a good business idea. 2

Roots of Microcredit: Grameen The idea of Microcredit began in the 1970s with the Grameen Bank (meaning village bank ) in India. It was created by Muhammad Yunus, an economics professor who was frustrated both with the poor conditions of villagers and their lack of access to small amounts of capital to improve their lives. Out of his pocket, Yunus lent a group of female basket-weavers enough money (about $5 each) to buy supplies for their own businesses. Since they had no collateral, the women formed peer groups to guarantee the loans jointly and so changed the whole paradigm of credit. In the last 30 years, Microcredit has shown that it can be used to create sustainable businesses that generate income for low-income families. In fact, people can use Microcredit to escape the poverty trap that keeps generations caught in a cycle of low income, limited education and poor health. Current research has shown that there are significant other benefits to children, families and the local economy. Economic self-reliance empowers individuals: they work harder for themselves; their families obtain better education and improved health; and the most vulnerable members of society, women and their children, are substantially better off. Today, the Grameen Bank delivers over 2 million loans a year and 10,000 members graduate out of poverty every month through a self-help philosophy that maintains self-worth and dignity. How does a Peer Lending program work? Peer lending starts with the formation of a small group whose members come together because they want to achieve personal but common goals. The foundation of the peer lending model is a strong group made up of individuals who promise to support each other. An organization a community agency, for example puts the word out to its clients and members about the opportunities offered by the Peer Lending Program. The organization does not get involved directly with a group s decision-making and planning, but it does facilitate the peer lending process in a number of ways, such as by making networking arrangements and setting up meetings and other events where likeminded people can connect. 3

Four Women and Un Gato: The Story of a Vancity Peer Lending group Peer Lending group members, L-R: Zinnia Clark, Blanca Salvatierra, Lucy Lopez and Anne Marie Slater Lucy Lopez, Blanca Salvatierra, Zinnia Clark and Anne Marie Slater came to Vancity s Peer Lending Program in 2004. The women had pitched their business ideas to each other, strengthened their plans with the feedback they gave one another, and made a commitment to secure each other s loans. That was proof enough for Vancity to grant the women the credit they were looking for. Each woman used this credit to start her own micro-enterprise. Lopez started Mi Salita, a Salvadorian and Brazilian handicraft import business. Salvatierra started Salva Tierra Foods, an organic salsa company. Clark started At Loose Ends Creations, a custom scarf and knitted items company. And Slater used the capital to expand her photography business. All four women are developing sound business skills while getting their enterprises established. This is good not only for their success as entrepreneurs, but also for their future employability in general. Twothirds of participants in the Peer Lending Program begin their enterprise while holding another full-time or part-time job. Most go on to either work at their new business full time or take on positions of greater responsibility in the labour force. In addition to building skills, the micro-enterprises started through funding from the Peer Lending Program give participants a source of income. Most earn profits of between $500 and $1,000 a month from their new venture. Lopez, for example, who started her import business after retiring from the workforce, uses the profit she makes to top up her pension. Shaheen Tejani, Community Business Program Manager at Vancity, says this benefit is of special importance to newcomers to Canada: Sixty-seven percent of immigrants don t have access to credit at Canada financial institutions when they arrive in the country. Programs like Peer Lending make a huge difference in their lives. The Peer Lending Program is designed to help people get their small business going, and then help them grow it so they can generate income, build skills or become large enough to access capital from conventional sources. 4

Each person in a Peer Lending Group must promise to support the other members and to meet regularly to discuss progress. This commitment must be made up front and before the group approaches the sponsoring organization for a loan. Once set up, the Vancity Peer Lending Program gives participants the chance to: Get access to small loans for business start-up and then to more loans as repayment ability and business performance are established. Generate income for their families and gain financial independence. Rebuild or improve their credit history and, for new immigrants, establish their credit history in Canada. Benefit from the support and network of other small business owners by, for example, building business and employment skills in areas such as sales, operations and customer service. What kind of credit are we talking about? The Peer Lending Program offers credit through a series of progressive levels. The first loan, a Level 1 loan is for $1,000. If this loan is repaid by a group member in full without ever being late and the rest of the group is also paying on time, then the paid-up member can apply for a higher level loan - $2,000, $3,000, on up to a maximum of $5,000. Once a member has established a solid credit history under this program, he or she can graduate to one of our Micro-Loans, ranging from $5,000 to $35,000. Another plus if business is good and a member has the records to show that, he or she can skip a level and move up faster. This step-by-step method lets members start small with very little risk (so they ll face little loss if their business isn t a success). But it also charts a course for growth so that a successful business can have access to the extra resources they need to keep thriving. $1,000 $2,000 $3,000 $4,000 $5,000 Monthly payment: minimum 3-month term, up to 24 months Ongoing access to credit based on individual and group track record Interest: Vancity prime + 3% Free networking/ training Microcredit Toolkit: A way to share our know-how with the community Our goal is to make financial services as widely available as possible to everyone. Reaching many people is a job best handled by the hundreds of organizations in our community that work every day with client groups. It s those organizations that understand the needs of their clients, have strong relationships with them and are in a strong position to deliver initiatives such as Peer Lending. We ve created this freely available version of the Microcredit Toolkit and its companion document, the Peer Lending Program Workbook, as a way of offering community organizations guidance in creating, managing and market their own Peer Lending Program. Included in these two booklets are documents, templates and other resources necessary to help a sponsoring organization help its clients achieve financial and personal aspirations. 5

Components of a Peer Lending Microcredit Program A Peer Lending Program typically has three main components. Organizations undertaking to sponsor peer lending should target each component to the special needs of their clients. Those needs will also affect how an organization markets, processes, delivers and reports on the loans. Client 1. Marketing 2. Group Management 3. Portfolio Management 1. Marketing The workbook provides all the sample resources an organization needs to market a Peer Lending Program to its target client group, including guidance in how to: Identify and form groups; Build partnerships in the community and; Provide basic information to individuals to increase their chances of success (Appendix 1, Tools 1-4). 2. Group Management Once peer loans have been funded, they are only viable if the groups are strong and can manage their own concerns and payments. Good group management and support is the crux of good repayment statistics. The Peer Lending Program Workbook contains exercises and questions to help Peer Lending Groups work effectively together to set goals, resolve issues and achieve success (Appendix 1, Tools 5-9). 3. Portfolio Management The workbook provides sample materials and information to support an organization in effectively managing its loan portfolio (Appendix 1, Tools 10-12). Note: Community organizations can form their own loan fund, or work with an existing community loan fund, a private foundation or a government agency to create an arrangement for setting aside capital for their program. We have a loan fund specifically to provide the capital for our Peer Lending Program, and we ve set a low-interest rate of prime + 3%. We charge no other fees or service costs for these loan accounts. This loan fund is available to community organizations in British Columbia who wish to develop a Peer Lending Program with us. What happens next: Graduation from Peer Lending Success in the Peer Lending program means that participants will leave the program. The long-term aim with peer lending is to help people get their businesses off the ground, develop their skills and credit so that they can move on to conventional financing. Graduating from the program is important and our workbook does have an application for larger Micro-Loans in the Portfolio Management section to graduate borrowers to an individual loan. We encourage borrowers to apply for conventional financing as their assets and businesses grow. 6

Contents of the Tookit Each of the presentations, documents, reports and templates included in the toolkit has been designed to help a sponsoring organization execute one of the following functions: 1. Marketing 2. Group Management 3. Portfolio Management Microcredit Toolkit 1. Marketing a. Microcredit: Get into Business (PowerPoint presentation) b. Peer Lending Overview c. Peer Lending Program Workbook d. Branch Loan Setup Form 1. Marketing Tasks a. Set up information sessions with target clients and deliver your customized Microcredit: Get into Business PowerPoint presentation. You can also print the presentation out and have a roundtable discussion. b. Use the Peer Lending Overview to educate interested individuals about going out and finding like-minded people to form a group. Three to seven people, each of whom wants to start a business, are needed to form a group. c. Encourage interested individuals to use the exercises in the Peer Lending Program Workbook to help them form a cohesive, well-functioning group. Through meetings, group members will assess each other s business idea, decide on their own rules of operation and discuss repayment options should a member be unable to pay. d. Once a group has completed the steps outlined in the workbook, have the program coordinator meet with the group to review its loan applications and complete a Branch Loan Setup Form that has been customized from the tool sample. 2. Group Management a. Group News: Monthly Report b. Marketing and Sales Plan c. Easy Bookkeeping System d. Cash Plan e. Next Loan Application 2. Group Management Tasks a. Ask groups to meet once a month and to email, fax, or mail, following each meeting, the 1-page Group News report. b. c. d. Encourage the group to use other tools to help it grow and keep track of the businesses tools such as the Marketing and Sales Plan, the Easy Bookkeeping System and the Cash Plan (all of which the sponsoring organization should adapt for its own use). Consider holding workshops on each of the above areas to provide groups with this information, or meeting one-on-one with groups or individuals to discuss these tools. e. Once a group has paid off its first loan (in 3-12 months), members may want to expand their businesses with the next loan level. Adapt the Next Loan Application to verify the use of the previous loan and status of the businesses. This form also requires the group to agree to the next loan before they contact the sponsoring organization. 7

Microcredit Toolkit 3. Portfolio Management a. Portfolio Report b. Monthly Loans Report c. Micro-Loan Application 1. Portfolio Management a. To keep track of each group, its members, the status of each loan, and members businesses and contact information, customize the Portfolio Report spreadsheet. b. Customize the sample Monthly Loans Report to provide a simple listing of loan activity for the month or quarter. c. For group members who have completed their peer loans, let them know about the Vancity Micro-Loan Application, which would give them access to additional capital. Key success factors There are 3 major success factors that any sponsoring organization should keep in mind in any Microcredit program: 1. Social cohesion, leading to strong groups 2. Simple, accessible process 3. Policies and procedures targeted to the needs of clients Social cohesion, leading to strong groups Microfinance began in the developing world in societies with a high degree of social cohesion and where people have strong social structures and interdependencies. Such cohesion creates a peer pressure that encourages individuals to repay loans and support each other. In Canada, this social cohesion is found in community organizations, immigrant groups, religious communities and geographical areas where people have had the chance to build this cohesion. The peer lending model s foundation is the strong relationship of each person in the group with the others. Your organization cannot form groups for people: people must form their own groups and identify a common need. That s the golden rule of successful microfinance. You can enable this process with networking, meetings and other events where like-minded people can meet, but there will never be a strong bond among members if the group was formed from the outside. Each person in the group must promise to support, take responsibility for, and meet regularly with every other member. This commitment has to be created up front and before the group approaches your organization for a loan. It is a process that cannot be rushed. Vancity s Peer Lending Program Workbook includes information on this issue. Simple and accessible process Your program will succeed if you create a simple and accessible process for your target clients. At Vancity, we have laid out the process step by step to allow groups to work on their own timeline. The Peer Lending Program Workbook provides full details. 8

Policies and procedures targeted to the needs of clients Clear policies and procedures must be in place for all major issues. Some of the key areas for which policies and procedures are needed and should be adapted for your own program include: Group conflict guidelines: how to add members, remove members, resolve group conflict Interest rates Payment dates Fees/postponement allowance Penalties (if any) for late payments Responsibilities of the group members Getting the next loan The Peer Lending Program Workbook outlines many of Vancity s policies, which can help you finalize your own. Getting started To get started, you will need to do 3 things: 1. Establish the objectives of your program. This should include a detailed analysis of the needs of your clients and the outcomes you want from the program. 2. Establish policies and processes for group creation and maintenance and for loan provision and repayment. 3. Customize the tools for your use. The tools that come as part of this package are templates which you can modify to better suit the nature of your organization and its policies and procedures. The materials in the workbook will provide you with everything you need to operate a Peer Lending Program. See Appendix 1 for a complete list of what is available. 9

Key questions an organization should ask before starting a Peer Lending Program What would be the focus of our microcredit program? Have you conducted a needs analysis to determine whether your clients need these loans and whether they have the skills and support to operate a microenterprise? A Microcredit program has to fit the core focus and objectives of your organization, as well as suit the needs of your clients. Do we have an environment where we can find strong groups? It is imperative that you have a clientele who live in a strong community from which you can draw individuals to form a strong group. It is almost impossible to create social cohesion from the outside. That is why successful peer groups are usually formed in ethnic, religious or immigrant communities. People involved in educational groups and in any other pursuit where they develop strong relationships can also form strong groups. Is there a real need? Is there a lack of access to small business capital in your target group? If there are other ways for participants to secure start-up capital, you may not have a large enough client pool. At Vancity, our research told us that low-income and marginalized groups in our community did not have access to capital. What is the small business environment like at the moment? Microenterprises are particularly vulnerable to competition, economic swings and other factors that can put pressure on small business. It is important to know if the business environment will allow the efforts of your peer groups to succeed. Have we set specific goals for the program and do we have resources to operate the program? The idea of group-based lending is that the groups manage themselves and that, most of the time, they be able to resolve their own problems at monthly meetings. A program coordinator is required to ensure: that groups are established properly; that conflicts are resolved and, if necessary, facilitation is provided; and that performance is monitored on the loans. Do we have the resources to support peer groups and provide business advice to those who create microenterprises? The program coordinator has to help assess the business ideas of the groups to ensure those ideas are realistic and viable. As businesses get started, many of the members need business advice on how to manage cash flow, increase sales and obtain additional capital. Your organization may need partners to support these fledgling businesses so that they continue to grow. 10

Appendix 1: List of sample tools on CD-ROM 1. Marketing a. Microcredit: Get into Business PowerPoint Presentation b. Peer Lending Overview Word Document c. Peer Lending Program Workbook Word Document d. Branch Loan Setup Form Excel Spreadsheet 2. Group Management a. Group News: Monthly Report Excel Spreadsheet b. Marketing and Sales Plan Excel Spreadsheet c. Easy Bookkeeping System Excel Spreadsheet d. Cash Plan Excel Spreadsheet e. Next Loan Application Word Document 3. Portfolio Management a. Portfolio Report Excel Spreadsheet b. Monthly Loans Report Excel Spreadsheet c. Micro-Loan Application Word Document Appendix 2: Resources and information on Microfinance and Microcredit Here are some links to information resources on the web to provide additional information: vancity.com/peerlending Vancity s Peer Lending Program information. www.microfinance.ca A website created for the UN International Year of Microcredit in 2005, was created by Canadian organizations in microfinance and has listings of active programs in Canada www.microfinancegateway.org A comprehensive gateway with a library, information on organizations, events and other resources related to microfinance worldwide www.mcrocreditsummit.org The Microcredit Summit Campaign - Reaching 100 million poorest families by 2005 A website dedicated to the achievement of the Millennium Development Goals of the UN. www.grameen.org Grameen-Banking for the poor. The website of Grameen Bank, the originator of Microcredit. 11

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