Micro-credit

The objective of providing micro-credit by MEDEP is to support and promote men and women of low-income families to develop micro-enterprises through entrepreneurship development to create employment and income-generating opportunities to reduce poverty.

Micro-credit activity in MEDEP refers to a process of facilitating micro-entrepreneurs to have an easy access to small-scale loans in different cycles to micro-entrepreneurs to fulfil credit capital needs of their enterprises. Micro-credit component of MEDEP is mainly implemented in close collaboration with Agricultural Development Bank whereas other institutions such as Local Development Fund/DDC, commercial banks, cooperatives are also linked at district level as per the specific micro-credit need and situation of districts.

As MEDEP encourages micro-entrepreneurs to establish micro-entrepreneurs groups, cooperatives and products associations, regular-saving generation is made compulsory in such groups with an expectation that saving-capital thus generated helps group members in other small cash-needs and also helps to develop group as an institution. Therefore, micro-credit component of MEDEP broadly includes saving-generation and mobilization as well.

The loans, though modest, are within the capacities of the groups to repay as they obtain income from their activities. The groups are small enough, (five to 11 members) and the members are put into a context in which they put social pressure on defaulters. To ensure that micro-finances are optimally used by entrepreneurs the programme requires that certain basic principles are followed while disbursing loans to entrepreneurs.

  • Utilization and repayment: Micro-credit is disbursed to entrepreneurs on the basis of business plan. As MEDEP staff are residential at fields, they take very minute care on the utilization of loan as per the planning. Enterprise Development Facilitators make very close supervision or even they work together with the entrepreneurs to go to market to purchase raw materials and purchase fixed assets to ensure that there is proper utilization of credit.
     
  • Repayment: All the loans recommended by MEDEP are to be repaid within one year. Generally, there are 12 monthly instalments for repaying loans. But, in the case of some enterprises that require preparation of more than one month for production to begin, the instalments are less than 12 months. However, the loan needs to be repaid within one year and loan exceeding one year are considered as default and loans exceeding regular instalments period are considered as overdue loans.
     
  • Monitoring: The partner organizations make regular visit to micro-entrepreneurs for monitoring the enterprise development activities initiated through to micro-credit capital.
     
  • Graduation: In the second phase of MEDEP, micro-entrepreneurs meeting with graduation criteria were awarded with certificate as graduate entrepreneurs having good enterprise development performance. Such micro-entrepreneurs were taken as the regular client by ADB/N for further collateral or project-financing-based lending. Further, coordination was made with other financial institutions to give better recognition for such entrepreneurs.

Operational Procedure

Selection of Low-income Families

The target beneficiaries of MEDEP are low-income families below poverty line. Members of such families are surveyed, screened and finally selected by giving priority to unemployed female members having potentials to develop as micro-entrepreneurs. As no physical collateral is required for the disbursement of micro-credit, high importance is given to involve members of low-income families who are really poor and have no significant physical collateral to submit. MEDEP does firmly believe that poor families which are really in need to establish and operate micro-enterprises for their better livelihood are more credible as micro-credit borrowers.

Formation of Micro-Entrepreneurs' Groups

Micro-entrepreneurs that have gone through entrepreneurship development training and that are finally ready to operate micro-enterprise in a new way are then encouraged to form groups called as micro-entrepreneurs' groups (MEGs) comprising at least 5 persons. The main reasons for forming MEGs is to facilitate micro-entrepreneurs to have easy access to physical collateral-free micro-credit and to have other services being offered by MEDEP through its partner organizations. Besides, as borrowers do not mortgage physical collateral to get micro-credit, guarantee is required from a group to make all group members accountable to the proper utilization and repayment of loans.

Recommendation for Micro-credit

Micro-entrepreneurs organized into groups conduct group meeting and take various decisions required for successful operation of their enterprises including decision related to the micro-credit need of micro-entrepreneurs in-group. Micro-entrepreneurs requiring micro-credit prepare business plan, fill-up forms of ADB/N and submit it to DPIO, MEDEP along with the minute of group meeting and EDF of MEDEP provides technical support to entrepreneurs during the process. MEDEP DPIO analyzes the loan demand and finally recommends ADB/N for disbursement and there are two ways of recommending such loans.

New Situation of Micro-credit

During the first phase, MEDEP had developed partnerships with ADB/N creating a joint micro-credit fund. Entrepreneurs had easy access to loan due to three reasons: (1) EDFs of MEDEP used to facilitate entrepreneurs to process all the necessary documents (2) ADB/N had wide spread network of its branches and sub-branches and (3) special provision of credit procedure was prepared and agreed by both parties and followed uniformly in all districts. However, due to the change in policy of ADB/N in 2005 it could not be continued.

With the withdrawal of the ADB/N from the micro-finance sector, new MEDEP entrepreneurs are having difficulties in financing their micro-enterprises, despite the fact that MEDEP has signed MoUs with a number of MFIs. Access to finance is especially difficult in hill districts and for highly disadvantaged entrepreneurs who lack citizenship certificates. As this changed from a single established MFI partner to multiple MFIs is recent, the situation is likely to improve. One consequence of having multiple MFIs is the difficulty in monitoring how many MEDEP entrepreneurs have loans, what their status is, and so forth.

Altogether, MEDEP records show that MEDEP entrepreneurs have borrowed at least Rs 41.4 million. In Phase I, more men borrowed than women; but in Phase II the situation reversed with many more women borrowers. This may be due to increased female entrepreneurs in the second phase. Borrowers are relatively more among indigenous nationalities. Dalit women had lesser access to finance than other categories. In totality, however, credit access in Phase II remained a serious constraint, despite the efforts made by MEDEP to make arrangements with a number of MFIs. Potential alternative sources and means of financing micro-enterprises might include Postal Saving and Community Forestry Groups. MEDEP's targets related to micro-finance have not been achieved and there is continued demand for such an access at proper interest rates across all segments of the micro-entrepreneurs.

Utilization of Micro-finance

 

Male

Female

Total Portfolio
(Rs. Million)

Phase I

1153

1097

35.5

Phase II

380

732

5.9

Phase III

 

 

 

Total

1533

1809

41.4

Percentage %

45.60%

53.40%

 


The basic issue for micro-finance component of MEDEP remains one of limited access. (Only 23.7 percent MEDEP entrepreneurs are reported to have accessed micro-finance.) Linkage to multiple local institutions operating on a commercial basis, however, is expected to provide better access in the medium term, but, for the most part at higher interest rates than were charged by the ADB/N. The new MFI's tend to charge interest (APR) of between 18% and 24%.

Based on the lesson learned in the first phase, a more sustainable micro-credit partnership approach was adopted in the second phase by identifying and mobilizing the local micro-finance intuitions (cooperatives and private and Rural Development Banks). We have learned that the especial provision for the short span of time will no longer be effective to provide the sustainable micro-credit services to the entrepreneurs. Nevertheless, it is very hard to get the reliable micro-credit institutions and therefore MEDEP is contributing to enhance the capacity development of smaller MFIs.

Consequently, during the second phase, the new policy of ADB/N compelled MEDEP to review their partnership and identify other potential micro-credit partner organizations. MEDEP had taken the changed policy of ADB/N not as a problem but as an opportunity to diversify its partnerships with more micro-finance institutions. The present micro-finance policy of the country has opened up avenues for delivering micro-finance services through Micro-finance Institutions (MFIs), s a result the number of MFIs have increased significantly even in the districts. This has provided opportunity for MEDEP to find suitable micro-financing partners in the programme districts.
 




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