How Village Banking Works
A village bank is an informal self-help support group of 20-30 members, predominantly female heads-of-household. If the program is “on mission”, in a normal village bank about 50% of all new members entering the program will be severely poor—representing families with a daily per-capita expenditure (DPCE) of less than US$1; the rest are moderately poor (DPCE=$1-2/day) or non-poor (DPCE >$2). These women meet once a week in the home of one of their members to avail themselves of working capital loans, a safe place to save, skill training, mentoring, and motivation. Loans normally start at $50-$100 and are linked to savings such that the more a client saves the more she can borrow. The normal loan period is four months and is repaid in 16 weekly installments. At the end of 2006, 95% of clients covered by a benchmark sample of 71 NGOs and institutions engaged in village bank lending were women.
To eliminate the need for collateral (the poor man's obstacle to receiving bank loans), village banks rely on a variation of the solidarity lending methodology. It relies on on a system of cross-guarantees, where each member of a village bank ensures the loan of every other member. This system gives rise to an atmosphere of social pressure within the village bank, where the cost of social embarrassment motivates bank members to repay their loans in full. The admixture of cross-guarantees and social pressure makes it possible for even the poorest people to receive loans. This method has proven very effective for FINCA, yielding a repayment rate of over 97% in its worldwide network. Village banks are highly democratic, self-managed, grassroots organizations. They elect their own leaders, select their own members, create their own bylaws, do their own bookkeeping, manage all funds, disburse and deposit all funds, resolve loan delinquency problems, and levy their own fines on members who come late, miss meetings, or fall behind in their payments.
There was some hope in the early years of village bank development that these small village organizations could become independent and self-financing, but this hope was later abandoned. Most village banks in operation today are directly supervised by the staff of a local NGO or microfinance institution, from which they receive much of their loan financing.
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