Sources of Funds
Market interest rates apply to village bank loans. At the end of 2006, the average portfolio yield for a sample 71 microfinance institutions engaged in village banking was 27.7%, after removing the effect of local inflation. The village bank itself will usually mark up this rate when it on-lends to individual members. While these rates seem high, they are low compared to those charged by local moneylenders in most countries. Unlike rural banks and credit unions these microfinance institutions do not provide savings services directly to their clients.
The capital for the loans is provided by FINCA with on-time weekly installment repayments collectively guaranteed by all members—i.e., a shortfall by one member must be covered by other group members. This joint liability form of microcredit is controversial, with Muhammad Yunus (for example) rejecting formal systems of joint liability in Grameen Bank's solidarity groups.
Read more about this topic: Village Banking
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