Micro Credit Systems for Small Enterprises in Developing Countries - Practical guide (GTZ, 66 p.) 2. Micro credit system (introduction...) 2.0.1 Small loan amounts 2.0.2 Two loans per entrepreneur 2.0.3 Appropriate interest rates 2.0.4 Administration fee 2.0.5 Revolving fund 2.1. Determination of the project area and selection procedure of participants (introduction...) 2.1.1 Checking, consulting and monitoring of the businesses 2.2 Group formation and tasks - Cooperative concept (introduction...) 2.2.1 Group responsibilities 2.2.2 Sub-group formation and responsibilities 2.2.3 Constitutional aspects 2.3 Loan Insurance Fund 2.3.1 Sub-group saving 2.3.2 Sub-group co-guarantee 2.4 Loan range and disbursement system 2.4.1 Loan range 2.4.2 First loan disbursement system - step by step 2.4.3 Special requisites for gardener and farmers 2.4.4 Loan disbursement by cheque 2.4.5 Control of the loan investment 2.4.6 Second loan disbursement system - step by step 2.5 Loan repayment 2.5.1 Short repayment periods - short tenors 2.5.2 Calculation steps 2.6 Micro credit system schedules (introduction...) 2.7 Loan Insurance Fund and loan collections 2.7.1 Importance of signatures 2.7.2 Importance of books 2.7.3 Importance of control

Micro Credit Systems for Small Enterprises in Developing Countries - Practical guide (GTZ, 66 p.)

2. Micro credit system

A micro credit system shall empower micro enterprises to improve, diversify and develop sustainable income generating activities among some of the most vulnerable groups of the society. Any project dealing with micro credit systems should assist to restore, develop and sustain the economic situation of disadvantaged social groups. All this can be done through business management training, business consultation and by providing adequate loans for businesses.

2.0.1 Small loan amounts

The loans are meant to finance working capital, equipment and tools. The Kabwe Enterprise Support Project for example disbursed loans ranging between¹ $100 - $500. Of course each project has to find out which loan amount is suitable for the actual business situation but in any case the loan amounts should be small since the enterprises are very small. The loan amount must be in relation to the existing business or to reliable business opportunities. It is necessary that the amount can be paid back in less than one year. Larger loans would create more problems for the entrepreneurs because they are not used to deal with large credit amounts. They must learn step by step to deal with more money for the business. A huge amount of money is easily misused as for example in case of emergencies. A large number of entrepreneurs can not imagine that their business can expand in a step by step process. They have to make the experience that the profit can be increased by small loans. Furthermore, in case of default only a small amount is lost so that there is still the chance to restart.

¹ All $ amounts in this booklet are related to US $.

2.0.2 Two loans per entrepreneur

The micro credit system described here is based on two loan payments per person. The first loan should be smaller than the second one since the entrepreneur is still in a learning process. In case of mistakes made and of any difficulties he will not lose a lot of money. Furthermore, the borrower is not well known at the time of the first loan payment. The first loan period must prove if he is really credit-worthy. The risk of the project to lose a lot of money due to bad loans is reduced by the smaller first loan amount.

Some entrepreneurs realise that they do not even need a second loan as they were able to stabilise and increase their business already with the first loan.

2.0.3 Appropriate interest rates

The interest rate should be similar to the one which the banks in the respective country would charge for small business loans of this kind. The interest rates are subject to change depending on the prevailing economic situation of the country. In the case that this interest rate is so high that the small entrepreneurs can not efford it, the interest rate for the first loan should be lower. But it has to be at least as high as the countries' inflation rate. But the interest rate on the second loan should be close to the one charged by the bank for a small loan. This prepares the entrepreneur to apply for a loan from a bank in the future.

If one provides loans with a fixed interest rate related to the interest rates charged by the bank as well as the inflation rate, one has to take into consideration that the inflation rate could fluctuate dramatically during the term of the loan.

The interest rate charged by the pilot project described here is a recurring charge which is fixed at 30 % per annum on the total principal amount. This means that each repayment period the interest paid is the same (i.e. 30 % of the principal (total loan) amount even though the borrower liquidates a bit more of his debt each period). The installments have to be paid accordingly to the term(s) of the loan. Examples of interest calculation can be found under topic 2.5.2 "Calculation steps".

In contrast to this simple concept of charging interest usually a bank would charge each payment period the interest rate on the amount of the outstanding debt. The first interest payment would therefore be on the principle amount but then the following ones would decrease from repayment period to repayment period. One should therefore be aware that unless the project's interest rate is much lower than the one of the bank (using the projects simple concept), the project participants would be charged more interest than they would be charged by the bank.

The simple concept for charging interest was chosen for the project as it is much easier to explain to the borrowers. Furthermore it needs much less administration work. Of course at the beginning of the project one has to determine carefully a realistic and fair interest rate for the simple concept.

When the pilot project was started the bank interest rate was 65 % per annum. It was decided to charge a fixed interest rate of 30 % per annum for the first loan. The difference looks quite amazing, but in reality the interest earned by the project is not so much less than the interest earned by a bank due to the different types of calculation. However the interest rate should have increased for the second loan. But before the second loan could be paid the interest rate charged by the banks had dropped from 65 % to 32 %. Therefore, at that time the fixed interest rate of the pilot project was higher than the one charged by the banks. It was decided to keep the interest rate of the first loan also for the second loan. This decision was made because from an economic point of view the interest rate charged for small loans should be higher than the one for large loans. The administrative work for both of them is the same, but the income from interest of the small loan is much lower. This is a major reason why small enterprises very rarely get a loan from a bank as the loan amount they need is too small. The bank would make a loss charging the same interest rate for these small loans as they request from their customers with medium sized or large businesses loans.

In order to find the appropriate interest rate:

· One has to fix the total loan amount which can be disbursed by the project.

· One has to decide the way how the interest rate should be calculated (simple concept or a bank's concept).

· One has to calculate how much income shall be generated out of the interest to cover the running costs of the whole project and to increase the loan capital.

· One has to estimate the repayment quota.

· One has to decide whether it should be the same, higher or lower than the interest rate charged by the banks in the respective country. In any case, one has to keep in mind that the target group must be able to repay the charged interest. In the running of the project the interest rates have to be adjusted accordingly.

2.0.4 Administration fee

The administration fee for small loans must be quite high since the administration work for a small loan are the same as for a large loan. But the earned administration fee by the same percentage on a small loan is less. The project described here was a social project which received financial support. Therefore, it was possible to charge the same administration fee which would usually be charged for a big loan by a bank.

The rate for the administration fee of the credit system described here is 2 % of the principal amount. It is a one time fee. For example, if a borrower who is in a production enterprise received $200 he must pay $4 as administration fee which is distributed over the repayment period.

2.0.5 Revolving fund

Loan distributions according to the credit rules will be done through the revolving fund. Loans are disbursed to entrepreneurs in groups. Each entrepreneur of the group has to repay his loan including the interest rate and administration fee to the project which can then lend the money again to other groups. The fund will be managed by the project. The revolving fund is a certain amount from the budget of the project which is assigned to be paid out as loans. This money has to be put on a separate project bank account. It must never be mixed with the running project costs. Loan repayment amounts including the interest rate and the administration fee have to be deposited in the bank account of the revolving fund. If a group repaid the loan, they can get a second loan or the next group will get a loan. At first, start with a few groups to get some experience on how the credit system works. If it works, more and more groups can benefit. If the loan repayment is bad one should work on the system to improve the repayment quota. Otherwise, the revolving fund will diminish more and more and the project will fail. The groups, and in particular each entrepreneur who received a loan are responsible for the following groups, their neighbours and thereby even for their society. If they do not repay their loan, others can not benefit from a loan, as they did.

The reasons why the project described organised the loan payment through it's own managed revolving fund instead of through the bank are as follows:

· Banks do not want to pay out small loans, because it is not profitable for them.

· The target group has no acceptable securities for the bank.

· Banks do not have the staff to give business consultancy.

· Banks are not able to finance business management training.

· In a social project one can chose their own interest rate, so that it is suitable for the target group.

· Many banks have made bad experiences with micro enterprises.

· Banks in development countries often do not offer a loan to women and to youth groups.

· Normally banks can not accept micro entrepreneurs since most of them do not have accounting books or balance sheets.

2.1. Determination of the project area and selection procedure of participants

In order to identify an appropriate project area the following has to be considered:

· The project area must have a realistic distance to the operating project office so that neither time nor money is wasted for travelling from the office to the meeting places and the participant's businesses.

· A group must be located in a distinguished, not too large area; for example a certain compound, village or market place.

· The area should be the business location of many micro entrepreneurs.

· The enterprises should have small shops or market stands. Thereby, they have a business address and new customers can find them easily. Furthermore, they must not go to their customers from door to door.

· It must be possible to set up four different groups in this area so that one Extension Worker can work with 4 groups simultaneously.

Entrepreneurs who are living in the identified project area have to write informal applications which include a description of their business as well as their financial situation and a request for training and financial assistance. In the first interview the Extension Worker completes the questionnaire for the business checks² figuring out if the entrepreneur fulfills the following basic conditions:

² See Appendix I: "Business Check Form".

· He is a country resident who has stayed in the area for at least two years.
· He has no criminal record.
· He has no outstanding debt.
· He has been running a business for at least the last 6 months. (Point 4)
· He has started investing in tools or equipment for the business. (Point 5)
· His income generating activities are viable.
· His business idea is profitable.
· His interest in training seems to be honest.
· He has basic knowledge about how to read, write and calculate.
· His loan request is in the offered range.
· He is between 21 and 50 years old.

Young people between 16 and 21 years old have to fulfil all of the above basic conditions except conditions four and five.

2.1.1 Checking, consulting and monitoring of the businesses

The Extension Worker is doing a physical business check of each interested enterprise which fulfills the basic conditions. The Extension Worker starts to open a separate file for each client including all important information and forms about the entrepreneur and his enterprise. The business persons have to be advised on an ongoing basis. Whenever it is necessary, another business check and a business consultancy should be performed. Business consultancy can also be done during the business management training. In these training sessions many questions and business problems are brought to a point. Together with the Extension Worker the group members discuss them and search for solutions.

When the Project Director and the Extension Worker of the area have checked the basic conditions and the business check forms of the entrepreneurs, they decide who will be invited to the "promotion and orientation meeting"³, which is the next step in the loan application procedure. Participants should not be from the same family. If there are various members from the same family it has to be decided who can join the project. Furthermore, the Project Director and the Extension Worker decide about the maximum loan amount for each entrepreneur. The loan amount must be realistic for each business depending on its size, the applicable business knowledge of the entrepreneur and the eagerness of the entrepreneur to work hard. At the promotion and orientation meeting the entrepreneurs have to be informed about their maximum loan amount.

³ See Chapter 3.1: "Promotion and orientation meeting".

2.2 Group formation and tasks - Cooperative concept

After identifying potential participants in a specific area they are invited to the promotion and orientation meeting' where the whole credit system will be explained and the group as well as sub-groups have to be formed. The entrepreneurs form a group which consists of 15 to 30 members. In the beginning it is better if the group is not too small because usually some entrepreneurs do not want to join the group after they became familiar with the credit scheme concept and in addition some other entrepreneurs will finally not be accepted.

2.2.1 Group responsibilities

The tasks of the group are as follows:

· Each group has to elect a chairperson⁴, treasurer and secretary.

⁴ Chairperson in the meaning of a chairman, chairwoman or a president.

· The group members have to check individual participants, their businesses and loan requests.
· They decide together if somebody is allowed to join them.
· They have to make sure that all members attend the orientation and training meetings.
· They have to assist each other in difficulties and problems.
· They have to control and organize the loan repayments.
· They are responsible that all members repay their loans.

The group can not get a second loan unless each participant has completely paid off his debt. The group has to learn that their loan is from a revolving fund. This means that, only if they repay their loan, other groups can get a loan. They must understand that they had the chance to get a loan and so they are responsible that other entrepreneurs can get the same assistance.

2.2.2 Sub-group formation and responsibilities

Groups will be further divided into sub-groups of 5, 6 or 7 participants. This will be done on a self-selecting basis because they have to be responsible for each other. The self-selection even enhances understanding and co-operation among the group participants. The criteria for a sub-group formation are based on the:

· Loan amounts
· Kind of the businesses
· Size of the businesses

The requested loan amounts of each entrepreneur in a sub-group must be the same and the size and the kind of the businesses should be similar. Members of one subgroup must be either in trading or service. Those who are in production business must form a separate sub-group. This is because the entrepreneurs who are in trading and service have to start to repay their loan after one week, meanwhile the people in production get a grace period of 10 weeks before they start to repay⁵. At least three entrepreneurs from each sub-group must be based at a permanent location, preferably in a market place or shop. The home address must be permanent for each business person.

⁵ See Chapter 2.5: "Loan repayment".

The sub-group members must be from the same locality and should know each other's character well. Participants must be trustworthy. They have to check the businesses from all of their sub-group participants and they have to assist each other. Each subgroup participant is a guarantor⁶ for all of the other sub-group members. Therefore they should be interested that the businesses of the other participants are running well so that they are all able to pay back their loan. Furthermore sub-groups draw up their own constitution for their own control and safety. All this strengthens the sub-group members among each another and their team work.

⁶ See Chapter 2.3.2: "Sub-group co-guarantee"

2.2.3 Constitutional aspects

The following aspects should be clarified and rules should be laid down in a subgroup's constitution:

· Name, address and "Identity Card" number of each participant
· Selection of a sub-group chairperson, treasurer and secretary
· Objectives
· Goals
· Meeting day and time
· Use of further savings
· Loan consent of each participant
· Discipline

Rules to be followed in case of:

· Death of a participant
· Default (alternative ways of recovering the loan)
· Move of a participant
· Violation against the project rules
· Resignation of membership
· Signatures

2.3 Loan Insurance Fund

2.3.1 Sub-group saving

Before the total loan is paid out to the first entrepreneur each participant of the subgroup has to save 10 % of his requested loan amount for the first loan. If he applies already for a second loan, he has to save 15 % of the principal loan amount. This money has to be given to the Extension Worker who deposits it immediately in a separate project bank account. The participants have to save this money in 8 weekly installments, meanwhile they undergo a Business Management Training. The saving starts simultaneously with the initial business management training for the period of 8 weeks. The savings serve as a security for the loan in case of a default. Therefore these savings are called Loan Insurance Fund (LIF). The client does not get any interest on the LIF. This is because the interest for each client is very low. The costs to calculate and pay out the individual interest would be higher than the interest earned on the total LIF. Furthermore, a lot of project services are done without cost covering charges or even for free, for example business checks and trainings. Before starting to save for the LIF each client has to sign an agreement for not receiving any interest on these savings. The LIF has to be deposited in a separate project bank account. The Project Director decides how the bank paid interest on the LIF should be used. Upon repayment of the loans received the LIF will be refunded.

2.3.2 Sub-group co-guarantee

The Loan Insurance Fund serves as a guarantee for non repaid loans. The sub-group members who get the same loan amount have to co-guarantee each other with the subgroup LIF saving. This will be effective through a loan guarantee form⁷ which must be signed by each sub-group participant. If a sub-group member fails to repay his loan the sub-group will advise the defaulter on how to solve the underlying problem. Each group member is equally responsible for a participant who fails to repay. Groups are encouraged to solve the repayment problem internally and they have to act according to their constitution. The Extension Worker has to be assured that everything possible has been done to overcome the borrower's failure. If all this is not sufficient to repay the missing amount, then the LIF of the sub-group has to be taken to recover the outstanding loan. In the event that the LIF is not enough to cover the outstanding amount of the defaulted loan the main group is required to assist in repaying the remaining balance. The whole group can only go ahead to get a second loan if the loan of each group participant is completely repaid. To write off a loan would be the ultimate step. The reasons why a loan is not recovered must be properly investigated before it can be decided to stop or to go ahead with the group.

⁷ See Appendix II under point 17 to 19: “Individual Loan Application and Approval Form”

The co-operative system allows that group members assist and learn from each other. Furthermore, the LIF system increases the pressure to repay for the whole group. Since, nobody wants to lose his LIF, everybody will prefer to assist and control the other participating entrepreneurs.

On completion of loan repayment by the whole group the LIF will be refunded to each participant according to their savings but without any interest, as described in chapter 2.3.1. In the case that the members apply for a second loan the LIF paid for the first loan can be carried forward to the LIF amount which must be saved for the second loan amount requested. Then the balance between the first and second LIF amount has to be paid.

2.4 Loan range and disbursement system

2.4.1 Loan range

The loan range of the described project was between $100 and $300 for the first loan and between $300 and $500 for the second loan. There were five loan payment categories for the first loan namely $100, $150, $200, $250 and $300. For the second loan payment there were also five categories namely $300, $350, $400, $450 and $500. It must be properly checked in which category each entrepreneur fits in.

2.4.2 First loan disbursement system - step by step

All participants must have paid the LIF in full and successfully attended the initial business management training for 8 weeks before they can receive the loan. Loans are paid out to groups of 10 to 28 members sub divided in groups of 5, 6 or 7 participants. Entrepreneurs who are in trading and services can be in the same sub-group but entrepreneurs who are in production can not be in the same group with trading or service enterprises. The credit disbursement system for the first loan applies as follows:

	Trading and Service	Production
Column numbers	1. 2. 3. Column	1. 2. Column
Disbursement period:	1. - 4. - 8. Week	1. - 12. Week
Sub-group with 5 members:	2-1-2 Persons	2 - 3 Persons
Sub-group with 6 members:	2-2-2 Persons	3-3 Persons
Sub-group with 7 members:	2-2-3 Persons	3-4 Persons

Table 1: Disbursement system for the first loan

Table 1 shows the credit system applied to trading & service and production respectively. The first individual loan payments are disbursed in the 1st week only to the number of members shown in the 1st column of each type of sub-group. For example in trading & service, at the beginning of the 1st loan disbursement week only 2 entrepreneurs of a 5 member sub-group receive their loan. In the 4th week only 1 person will receive his loan, provided that the first 2 persons fulfilled their expected installments.

Those in trading and service who got their loan at first have to start to repay their loan in the 1st week. They have to pay 4 full installments before the next sub-group members in the 4th loan disbursement week, as shown in the 2nd Column, qualify to receive their loan. The last group members receive the loan in the 8th week after the group shown in the 1st column paid 8 full installments and the group in the 2nd column paid 4 full installments. For example in a trading and service sub-group with 7 members the last 3 entrepreneurs get their loan in the 8th loan disbursement week assuming all of the other sub-group members, who received their loans earlier, repaid the expected installments fully.

Those in production are given a grace period of 10 weeks before they have to repay the first installment. After this grace period, those sub-group members who received the loan in the 1st week have to repay 2 installments before loans are disbursed to other sub-group members as shown in the 2nd column. Therefore the sub-group members in the 2nd column receive their loan 12 weeks later than the members in the 1st column. But if the entrepreneurs listed in the 1st column do not repay the two installments, the persons in the 2nd column do not get a loan at all.

This step by step disbursement procedure puts a high pressure onto those members who received the loan in the 1st week to start repaying the loan. Once the start is made it will turn out that it is not so difficult to repay the loan in weekly installments since the amounts are rather low. Therefore the borrowers will continue to repay the loan and the others in the group will follow.

2.4.3 Special requisites for gardener and farmers

Entrepreneurs in plant production have to do agriculture as well as horticulture which means they have to produce crops or fruits and vegetables. By doing so the risk of bad harvests and therefore the risk to default is reduced. For example, through bad weather a crop can be destroyed or worms can destroy the cabbage. Furthermore, it is better to cultivate various plants because they grow at different times and not everything is destroyed if something happens to one kind. The gardener and farmer should cultivate some indigenous plants. They are not so heavily attacked by pests, diseases or insects. So, as long as an entrepreneur does farming and gardening simultaneously, he can apply for a loan.

Gardeners and farmers must be given the loan at the right seasonal time. Therefore, most of them have to get the loan at the same time. This problem can be overcome by allowing only two gardeners and farmers to be in the same sub-group. Obviously, the time table for the whole group has to be managed in such a way that the gardeners and farmers get their loan at the right seasonal time. After the complete loan preparation and the initial business management training is done they have to wait until the right season starts for them. They have to be informed about this from the beginning. It does not make sense to give them the loan at the wrong time. Most probably the money is used for other things before the cultivation season starts. It must be clearly stated in the loan request for what the loan is needed, for example for seed, fertiliser or seedlings so that the proper time for loan disbursement can be fixed.

Some gardeners and farmers are in two or more businesses. For example they rear chickens or trade with cows as well. If this is the case both businesses have to be checked. If they do need a loan for both businesses it has to be done for both businesses. In this case, it is not so important at what time they get the loan.

The gardeners and farmers have to follow the same repayment system as the production group. Sometimes farmers like to repay a larger loan amount after harvesting. It can be accepted that they repay their loan within a shorter period but it must be clear that they have to pay the full repayment amount including the complete calculated interest and administration fee for the first loan as determined in the contract⁸. That is requested because the loan is granted only under these conditions and all the expensive preparation work was done for them in the same way as for any other entrepreneur.

⁸ See Chapter 2.5.1: "Short repayment periods - short tenors".

2.4.4 Loan disbursement by cheque

All loans are paid by cheques. The authorised persons from the project issue cheques of the approved loan amounts to the borrowers. Then the entrepreneurs have to withdraw the money from the bank on their own. If the borrower has his own bank account it is even better just to transfer the money to his bank account. If it is possible borrowers should open their own bank account. This can be done at any bank but it is advisable to open a bank account at the same bank where the project's account exists. In this case the transfer costs will be cheaper. The costs for transferring money or for issuing a cheque have to be paid by the borrowers. If a client does not have an "Identity Card" an authorised person for the project's bank account has to accompany the client to the bank to identify this person. Letting the borrower receive his loan through the bank proves that he really got a loan, it makes it more understandable to him that he got a loan which has to be repaid and not just a grant. Some disadvantaged people in developing countries are only used to receiving a grant from the government or from non-government organisations. Therefore, they have to understand what it means to get a loan. Furthermore, through cheques which have to be cashed at a bank the borrower will learn how a bank is working.

2.4.5 Control of the loan investment

A week after loans have been disbursed the chief of the area and/or the chairperson of the group or sub-group have to visit the enterprises. They have to confirm to the Extension Worker that the borrower really bought the material and items for which he received the loan. Is the money really used for the intended business and for the requested materials? In the event of any problem, as for example the borrower could not buy small chicks at the appropriate time, then controller gives advice and tries to find a solution together with the respective entrepreneur and Extension Worker. In the case that the money is misused the total amount of the loan has to be repaid immediately.

2.4.6 Second loan disbursement system - step by step

The loans of the whole group (not only of the sub-group) must be repaid before members can apply for a second loan. The entrepreneurs who apply for a second loan have to be rechecked. If necessary new sub-groups have to be formed. New formal application forms⁹ have to be filled in. The "Advisory Committee"¹⁰ checks once more the loan ability of each borrower. Then they decide about a second loan.

⁹ See Appendix II: "Individual Loan Application and Approval Form.
¹⁰ See Chapter 3.1.1: "Advisory Committee".

A similar credit system as for the first loan applies to the second loan. But all entrepreneurs get the same grace period of 4 weeks. There is no difference in disbursement and repayment periods between those in trading & service or production. So, for the second loan it is possible to form sub-groups with entrepreneurs who are in trading, service and production. It is better to put similar businesses in one sub-group so that they can share their business experiences. The credit disbursement system for the second loan applies as follows:

	Trading, Service and Production
	1. 2. Columns
	1. - 8. Weeks
Sub-group with 5 members:	2- 3 Persons
Sub-group with 6 members:	3-3 Persons
Sub-group with 7 members:	3-4 Persons

Table 2: Disbursement system for the second loan

Table 2 shows the credit system for the second loan payment. All entrepreneurs in trading, service or production get a grace period of 4 weeks. In the 1st disbursement week only the sub-group members shown in the 1st column get their individual loan. Then they have a grace period of 4 weeks before they start to repay their loan. After that they have to repay 4 loan installments. Assuming they repaid 4 loan installments in full the entrepreneurs in the 2nd column get their loan amount. Therefore, the persons in the 2nd column get their loan 8 weeks after the participants in the 1st column. For example in a sub-group with 7 members, first the 3 borrowers get a loan. After 4 weeks they start to repay their loans in weekly installments. If they repaid 4 weeks full installments then the 4 borrowers in the 2. column get their loan. Therefore, the remaining 4 sub-group members receive their loan 8 weeks later than the members in the 1st column. But if the entrepreneurs in the 1st column do not fully repay the 4 installments the persons in the 2nd column do not get a loan at all. The "Loan disbursement by cheque" and the "Control of the loan investment" will be done immediately after the second loan disbursement in the same way as after the first loan disbursement, as previously described in chapter 2.4.4 and chapter 2.4.5.

2.5 Loan repayment

2.5.1 Short repayment periods - short tenors

Each loan has to be repaid in weekly installments. Entrepreneurs who are in trading and service do not get a grace period for the first loan. They have to repay their first loan including a fixed interest rate of 30 % per annum and an administration fee of 2 % of the total loan amount in 26 weeks (half a year).

Entrepreneurs who are in production get a grace period of 10 weeks for the first loan. After the grace period they have to repay the total loan amount including a fixed interest rate of 30 % per annum and an administration fee of 2 % of the total loan amount in 26 weeks. They have to pay the interest rate also for the grace period of 10 weeks. Therefore, the interest will be calculated for 36 weeks which has to be repaid in 26 weeks.

All entrepreneurs get a grace period of 4 weeks for the second loan. After the grace period they have to repay the total loan amount including a fixed interest rate of 30 % per annum and an administration fee of 2 % of the total loan amount in 34 weeks. They also have to pay the interest rate for the grace period of 4 weeks. Therefore, the interest will be calculated for 38 weeks which has to be repaid in 34 weeks.

These short and regular weekly repayment periods are important for two reasons: Firstly, the amount to be repaid at a time is not high and secondly, it will be quickly realised if an entrepreneur has problems to repay. In that case the group committee and if necessary the Extension Worker can intervene immediately to tackle any occurring difficulties.

2.5.2 Calculation steps

In the described project the interest and administration fee is fixed to 30 % and 2 % respectively, as laid down in chapter 2.0.3 "Appropriate interest rate." With the help of the following example the calculation steps of the loan repayment are explained:

1. Example: An entrepreneur who is in trading borrows a loan of $200 for half a year and he has to start to repay his loan immediately without any grace period. The interest rate is fixed on 30% per annum and the administration fee is 2% of the total loan amount. His weekly and total payments are determined as follows:

1. One has to calculate how many weeks a borrower has to repay:

A year has 52 weeks and 12 month and half a year has 6 month: He has to calculate:
52 weeks : 12 month x 6 month = 26 weeks (y).
Variable "y" = for how many weeks a borrower has to repay
52 : 12 x 6= y

2. One has to calculate the weekly loan repayment:

$200 loan amount: 26 weeks = $7.6924¹¹ weekly loan repayment (a)

¹¹ The amount indicates four figures behind the comma because the sum which has to be paid should be fair. The round up at the end of the payment figures should be very low.

Variable "X" = for the loan amount which a borrower received.
X : y = weekly loan repayment (a)

3. One has to calculate the weekly interest payment:

Since the interest is fixed to 30 % per annum one has to calculate as follows:
30 : 100 =0.3 and so
$200 loan amount x 0.3 percentage : 52 weeks = $1.1539 weekly interest payment b
X x 0.3 : 52 = weekly interest payment (b)

Note: The interest rate is a recurring charge. Therefore if a borrower has a grace period before he starts to repay the loan, he has to pay the interest for the repayment period as well as for the grace period.

For example an entrepreneur in production gets a first loan of $200 and a grace period of 10 weeks. After the grace period he has to repay the loan in half a year = 26 weeks. His weekly interest payment is determined as follows:

$200 x 0.3 : 52 x (10 grace period + 26 repayment term) : 26 = $1.60 (b')
X x 0.3 : 52 x (10 + y) : y = payment for weekly interest including grace period (b')

4. One has to calculate the weekly administration fee payment:

2 : 100= 0,02 and so
$200 loan amount x 0,02 percentage : 26 weeks = $0.1539 weekly administration fee payment
X x 0.02 : Y= weekly administration fee payment (c)

Note: The administration fee is a one time charge which is distribute over the repayment period. Therefore the administration fee does not increase because of a given grace period. It depends on the principal amount which also does not change if a grace period is given.

5. One has to calculate the total weekly installment:

Weekly loan repayment + weekly interest payment + weekly admin. fee payment
$7.6925 + $1.1539 + $0.1539 = $9 total weekly payment (z)
Variable "z" = for the total weekly installment
a + b + c = z

6. One has to calculate the grand total installment:

$9 total weekly repayment x 26 weeks of repayment = $234 grand total repayment
z x y = grand total installment

The same calculation steps from point 1 to 6 are shown in a table form as follows:

The LIF calculation steps as described under chapter 2.3.1 "Sub-group saving" are also shown in the following table:

Variable X = for the loan amount which a borrower received
Variable y = for how many weeks a borrower has to repay
Variable z = for the total weekly repayment

8 weeks LIF payments $ Week. Total instal.		Received Loan amount §	26 weeks Loan repayments	26 weeks Interest payments	26 weeks Admin fee payments	Weekly Total installments	Grand Total $
10 % LIF		100%	100%	20%	2%
200 x 0.1 :8 =2.5	2.5 x 8 =20	=200	200 : 26 = 7 6924	200 x 0.3 : 52 = 1.1539	200 x 002 : 26 = 0.1539	7.6924 +1.1539 +0.1530 = 9.0002	9 x 26 = 234
Form X x 0.1 :8 =we. Insta.	Form X x 0.1 =Total	Form: =X	Form: X : y = a	Form: X x 0.3 : 52 = b	Form: 200 x 0.02 : Y = c	Form: a + b + c = z	Form: z x y = Grand Total

Table 3: LIF and loan repayment calculation steps

2. Example An entrepreneur who is in production borrows a second loan for the amount of $300. He gets a grace period of 4 weeks. After the grace period he has to repay the total loan amount in 34 weeks including a fixed interest rate of 30% per annum and an administration fee of 2% of the total loan amount. His weekly and total payments are determined as follows:

8 weeks LIF payments $ Week. Total instal.		Received Loan amount $	34 weeks Loan repayments	34 weeks Interest payments	34 weeks Admin. fee payments	Weekly Total installments	Grand Total $
15 % LIF		100%	100%	30%	2%
300 x 0.15 : 8 = 5.63	5.63 x 8 = 45	= 300	300 : 34 = 8.8236	300 x 0.3 : 52 x 38 : 34 = 1.9344	300 x 0.02 : 34 = 0.1765	8.8236 + 1.9344 + 0.1765 = 10.9345	10.9345 x 34 = 371.773
Form X x 0.15 : 8 = We. Insta.	Form X x 0.15 = Total	Form: = X	Form: X : y = a	Form: X x 0.3 : 52 x (4 + y) : y = b'	Form: 200 x 0.02 : Y = c	Form: a + b' + c = z'	Form: z' x y = Grand Total

Table 4: LIF and loan repayment calculation steps including grace period

Note: The business management training continues throughout the period of the first and second loan repayments. For most of the entrepreneurs a lot of the training topics are new and often their education level is low. Therefore they need a long time to be trained until they are experienced enough to manage their business without any assistance from the project.

2.6 Micro credit system schedules

The following three micro-credit-system schedules should summarise the important aspects of the credit system. It can be printed as a hand out and should be given to each group. The tables should be written on a large paper and put on the wall during the lessons as lecture paper, it will help to explain the LIF savings, the disbursement of loans and the loan repayment system:

Project Name
Micro Credit System Schedule
First Loan for Micro Entrepreneurs in Trading and Service

LIF (Loan Insurance Fund) saving and initial Business Management Training

The LIF consists of a savings of 10 % of the requested loan amount before the loan is completely received. The LIF has to be paid while undergoing a weekly business management training for the period of 8 weeks. After the loan disbursement the weekly training continues until the loan is repaid. The LIF will be refunded after the completion of the loan repayment. No interest will be paid on LIF.

Loan amount, Interest and Administration fee

Loan amounts range between $100 and $300. The total amount of the received loan including interest and administration fees has to be repaid in 26 weeks. No grace period is given. The interest rate is fixed at 30 % per annum. The administration fee is charged at 2 % of the total loan amount.

System 1 : 4 : 8

Loans are disbursed to sub-groups of 5, 6, or 7 members using the system 1:4:8

	Trading and Service
Column numbers:	1. 2. 3. Columns
Disbursement period:	1. - 4. - 8. Week
Sub-group with 5 members:	2 - 1 - 2 Persons
Sub-group with 6 members:	2 - 2 - 2 Persons
Sub-group with 7 members:	2 - 2 - 3 Persons

Table 5: Disbursement system for the first loan in trading and service

The system 1-4-8 means that in the 1st week loans are only disbursed to the persons shown in the 1st column. If these members have fully repaid their first 4 weekly installments, the borrowers shown in the 2nd column receive a loan. The persons in the last column receive the loan 8 weeks later than the first borrowers assuming that all of the other borrowers who received their loans before having fully paid the expected weekly payments.

Terms of weekly payments

8 weeks payments $ week. Total instal.		Received Loan amount §	26 weeks Loan repayments	26 weeks Interest payments	26 weeks Admin. fee payments	Weekly Total installments	Sum of Total repayments
1.25	10.00	100.00	3.8462	0.5770	0.0770	4.50	117.00
1.88	15.00	150.00	5.7693	0.8654	0.1154	6.75	175.50
2.50	20.00	200.00	7.6924	1.1539	0.1539	9.00	234.00
3.13	25.00	250.00	9.6154	1.4424	0.1924	11.25	292.50
3.75	30.00	300.00	11.5385	1.7308	0.2308	13.50	351.00

Table 6: Terms of weekly payments for the first loan in trading and service

Project Name
Micro Credit System Schedule
First Loan for Micro Entrepreneurs in Production

LIF (Loan Insurance Fund) saving and initial Business Management Training

The LIF consists of a savings of 10 % of the requested loan amount before the loan is completely received to. The LIF has to be paid while undergoing a weekly business management training for the period of 8 weeks. After the loan disbursement the weekly training continues until the loan is repaid. The LIF must be refunded after the completion of the loan repayment. No interest will be paid on LIF.

Loan amount, Interest and Administration fee and Grace period

Loan amounts range between $100 and $300. The grace period is 10 weeks. After the grace period the loan amount has to be repaid in 26 weeks. Therefore, the total loan amount including a fixed interest rate of 30 % per annum and an administration fees of 2 % of the total loan amount has to be repaid after 36 weeks.

System 1:12

Loans are disbursed to sub-groups of 5, 6, or 7 members using the system 1:12

	Production
Column numbers:	1. 2. Columns
Disbursement period:	1. - 12. Weeks
Sub-group with 5 members:	2 - 3 Persons
Sub-group with 6 members:	3 - 3 Persons
Sub-group with 7 members:	3 - 4 Persons

Table 7: Disbursement system for the first loan in production

The system 1-12 means that in the 1st week loans are only disbursed to the persons shown in the 1st column. If these first members have fully repaid their first 2 weekly installments after the grace period of 10 weeks the borrowers as shown in the 2nd column receive a loan. Therefore, the persons shown in the 2nd column receive their loan 12 weeks later than the borrowers in the 1st column assuming that all of the other borrowers who already received their loan before having fully paid the expected weekly payments.

Terms of weekly payments:

8 weeks LIF payments Week. Total instal.		Received Loan amount $	26 weeks Loan repayments	26 weeks Interest payments	26 weeks Admin. fee payments	Weekly Total installments	Sum of Total repayments
1.25	10.00	100.00	3.8462	0.7989	0.0770	4.72	122.72
1.88	15.00	150.00	5.7693	1.1983	0.1154	7.08	184.08
2.50	20.00	200.00	7.6924	1.5977	0.1539	9.44	245.44
3.13	25.00	250.00	9.6154	1.9971	0.1924	11.80	306.80
3.75	30.00	300.00	11.5385	2.3964	0.2308	14.17	368.42

Table 8: Terms of weekly payments for the first loan in production

Project Name
Micro Credit System Schedule
Second Loan for Micro Entrepreneurs in Trading, Service, Production

LIF (Loan Insurance Fund) and initial Business Management Training

The LIF consists of a savings of 15 % of the requested loan amount before the loan is completely received. The LIF has to be paid while undergoing a weekly business management training for the period of 8 weeks. After the loan disbursement the training continues until the loan is repaid. The LIF must be refunded after the completion of the loan repayment. No interest will be paid on LIF.

Loan amount. Interest and Administration fee and grace period

Loan amounts range between $300 and $500. For all entrepreneurs the grace period is 4 weeks. After the grace period the loan amount has to be repaid in 34 weeks. Therefore the total loan amount including a fixed interest rate of 30 % per annum and an administration fee of 2 % of the total loan amount has to be repaid after 38 weeks.

System 1 : 8

Loans are disbursed to sub-groups of 5, 6, or 7 members using the system 1 : 8

	Trading, Service and Production
Column numbers:	1. 2. Columns
Disbursement period:	1. - 8. Weeks
Sub-group with 5 members:	2 - 3 Persons
Sub-group with 6 members:	3 - 3 Persons
Sub-group with 7 members:	3 - 4 Persons

Table 9: Disbursement system for the second loan

The system 1-8 means that In the 1st week loans are only disbursed to the persons shown in the 1st column. If these first members have fully repaid their first 4 weekly installments after the grace period of 4 weeks the borrowers in the 2nd column receive a loan. Therefore, the persons shown in the 2nd column receive their loan 8 weeks later than the borrowers in the 1st column assuming that all of the other borrowers who already received their loan before having fully paid the expected weekly payments.

Terms of weekly payments

8 weeks LIF payments Week. Total instal.		Received $ - Loan amount	34 weeks Loan repayments	34 weeks Interest payments	34 weeks Admin. fee payments	Weekly Total repayments	Sum of Total repayments
5.63	45.00	300.00	8.8236	1.9344	0.1765	10.93	371.62
6.57	52.50	350.00	10.2942	2.2568	0.2059	12.76	433.84
7.50	60.00	400.00	11.7648	2.5792	0.2353	14.58	495.72
8.44	67.50	450.00	13.2353	2.9015	0.2648	16.40	557.60
9.38	75.00	500.00	14.7059	3.2240	0.2942	18.22	619.48

Table 10: Terms of weekly payments for the second loan

2.7 Loan Insurance Fund and loan collections

The Loan Insurance Fund payments and loan repayments including the interest rate and administration fees have to be collected before the weekly business management training starts. At the begin of each meeting each sub-group treasurer or the group treasurer collects the money. Each borrower receives an individual loan repayment card¹² which the treasurer signs immediately after he has received the money. Furthermore, the treasurer fills the collected amounts into the respective LIF form¹³ and loan repayment form¹⁴. These forms full fill the same purpose as a receipt. The treasurer delivers the money to the Extension Worker who also signs for receiving the money after he checked the repayment forms. The money has to be handed over to the treasurer and to the Extension Worker in the presence of the whole group. The Extension Worker takes the money directly to the bank. Each time one representative of the group should accompany the Extension Worker on this trip. The bank slip together with the duplicate of the LIF payment or loan repayment form have to be brought to the Project Director. The Project Director checks if everything is correct and if the bank slip is attached, then he signs. The Project Director hands the forms over to the Book-Keeper who credits the member accounts respectively¹⁵. At any time the Book-Keeper must know the actual balance (or at least the balance of the week before) of the LIF and loan repayment of each borrower. If his LIF and loan repayment accounts are not up-to-date the Project Director has to warn the Book-Keeper. Hereby, a lot of cash money is involved and if the accounting books are not checked frequently frauds are possible.

¹² See Appendix VII: "Individual Loan Repayment Receipt Card".

¹³ See Appendix V: "LIF Savings Receipt Form."

¹⁴ See Appendix VIII: "Loan Repayment Receipt Form."

¹⁵ See Chapter 4.3 under point d "LIF Savings Account Book" and -Appendix IX: "Loan Repayment Account Book".

2.7.1 Importance of signatures

LIF payments and loan repayments have to be done during the group meetings and not in public streets or homes. Money shall never go from one hand to an other without a signature. Everybody has to check extremely carefully that all signatures are given. This has to be stated clearly as the high risk of corruption and fraud has to be taken into consideration at all times. No money can be claimed and no one can be found guilty without his signature on the respective form. The person who gave the last signature has the responsibility for the money and has to bear the consequences.

2.7.2 Importance of books

All forms have to be in books, never ever (!) on lose papers. All books and all pages of the books have to be numbered. Before the books are handed out to the respective persons the Project Director has to sign each book on the cover page. Furthermore the Project Director has to write down who got which book. The respective person has to sign for receiving it.

2.7.3 Importance of control

The Project Director and Book-Keeper should never be involved in any cash transactions in connection with the LIF payment or loan repayment. Therefore, they have to control if all the collected money is banked. A Project Director has to be aware whenever a LIF payment or loan repayment is expected and has to control if the money is deposited on the bank account. It is important that the Project Director has a list showing which group at which day has to make a repayment. Even at a time in which a person or a group did not pay the weekly LIF or loan repayment, the respective forms have to be filled with a zero and signed by the treasurer and the Extension Worker. Then the Extension Worker shows the loan repayment forms, even when nothing was repaid from the borrowers. The Project Director has to check the LIF payment forms and the loan repayment forms together with the bank slip. That is the only way the Project Director can be sure that no money has been collected without being deposited in the bank. At the beginning of each month the Book-Keeper has to do a bank reconciliation which is checked by the Project Director each time. Each LIF and loan collections have to be filled in the "Cash Book"¹⁶ of the project. This helps in the bank reconciliation to find out if all the loan repayments are banked.

¹⁶ See Chapter 4.2: "General administration work"

Trust is good, control is better! Signatures have to be given immediately! That has nothing to do with friendship. That is good and fair business. Good and fair business keep friendships!