Want to Know How to Get Loan from Microfinance Bank? Microfinance institutions, also known as microfinance banks, provide small collateral-free loans and other financial services to individuals and small businesses who lack access to conventional banking services.
These community-based financial institutions are an important source of credit for many low-income entrepreneurs and households in developing countries.
In this article, we will discuss the step-by-step process of applying for and obtaining a loan from a microfinance bank. We will explore the eligibility criteria, required documents, application procedures, loan approval process, repayment terms and more.
The information provided here is aimed at educating potential borrowers on effectively accessing affordable credit from microfinance to support their financial needs and empower their livelihoods.
Understanding Microfinance Banks: How to Get Loan from Microfinance Bank
Microfinance banks were introduced to promote financial inclusion by providing poor and low-income segments of the society with occupational support in the form of small loans, savings, micro-insurance and payment/remittance services.
They are regulated by central banking authorities and have a not-for-profit orientation focused on development objectives rather than profit maximization.
Some key points about microfinance banks:
- Target clientele are low-income households, small business owners, informal sector workers and entrepreneurs who lack collateral or credit history.
- Loans are typically small-scale ranging from a few hundred to a few thousand dollars based on need and repayment capacity.
- Loans are collateral-free but borrowers must join a solidarity group for joint liability which acts as a repayment enforcement mechanism.
- Interest rates tend to be lower than money lenders but higher than traditional banks to cover operational costs of small-scale lending.
- Savings products and microinsurance are also offered to build financial discipline and stability among clients.
- Located within communities to ensure proximity and emphasize development goals over profits.
Understanding these characteristics of microfinance institutions will help you determine their suitability for your financial needs and apply effectively for a loan.
Eligibility Criteria for Loans
Please ensure that you meet the basic eligibility requirements by contacting the microfinance institution directly before submitting your application. This will help prevent any rejections resulting from ineligibility and speed up the loan processing.
To qualify for a loan from a microfinance bank, borrowers generally need to meet the following basic eligibility criteria:
Residence
Applicants must reside within the local community or target area of operations of the microfinance bank. This ensures proper monitoring and coordination of loan activities.
Age
The minimum age for borrowing is normally 18 years. In some cases, microfinance programs allow loans to groups with younger members too.
Existing Business/Livelihood
The loan amount is meant for income-generating activities like crop cultivation, livestock rearing, small shops, services etc. Borrowers must demonstrate an existing occupation or business plan.
Savings History
Building a savings history through regular small deposits is usually mandatory to assess financial discipline. A minimum saving period may be required before loan eligibility.
Group Membership
Loans are granted to individuals as part of a solidarity lending group for joint liability. Group selection, dynamics and cohesion are thoroughly evaluated.
Repayment Capacity
Ability to repay the loan from regular cash flows must be evident from the proposed income-generating activity and household cash budget.
Documents Required for Loan Application
To initiate the loan application process at a microfinance bank, you will need to submit certain crucial documents. Having these documents ready will allow for a smooth submission. The common documents required include:
- Valid ID proof like voter ID, driving license, passport or Aadhaar card.
- Address proof like ration card, utility bill or bank statement.
- Age proof like birth certificate, school leaving certificate or passport.
- Business/livelihood details & proof like registration, existing accounting or local authority permit.
- Savings passbook reflecting the installment amount and date.
- Photograph of yourself as well as all group members.
- Filled application & declaration forms available from the microfinance branch.
- Introduction letter from the group or Area Office if required.
- Cash-flow projections and budget estimates for the proposed activity.
- Any other documents mandated by the specific microfinance program policies.
The Application Process: How to Get Loan from Microfinance Bank
Once you have prepared yourself with all necessary documents and details, follow these steps to formally apply for a microfinance loan:
Identify & Contact Relevant Microfinance Bank
Find the nearest branch and meet the staff to understand products, eligibility and application procedure.
Submit Application Form & Documents
Provide complete, accurate information on the prescribed forms along with identity, address and activity proofs.
Eligibility Assessment & Verification
Officers screen the application, visit your home/business and interview you for eligibility assessment.
Group Discussion & Approval
Application moves to the Joint Liability Group for discussion and endorsement. Group dynamics are analyzed by officers.
Loan Appraisal & Sanctioning
Eligible applications are appraised based on cash flows. Loan committee approvals loans below or equal to sanctioned amount.
Loan Disbursement
Approved loans are disbursed by cheque or cash at the bank to borrower’s savings account. Enter loan details in passbook.
Post-disbursement Briefing
Briefing conducted on loan terms, group roles, savings & repayments. Clarify any doubts regarding utilization & monitoring.
Completing this application process may take 1-4 weeks based on loan size, programs and bank workloads. Provide correct information, connect with neighbors applying and follow-up for timely completion.
Understanding Loan Terms
It is critical to be aware of key loan terms and conditions applicable before accepting the loan amount. This informs realistic expectations and enables responsible utilization and repayment management. Common loan terms by microfinance banks include:
- Loan Amount: As sanctioned within limits for your business activity and group. Eg. N10,000
- Interest Rate: Usually around 24-30% annually. Quarterly/monthly interest is deducted from principal.
- Repayment Period: Most loans are short-term of 6 months to 1 year in weekly/fortnightly installments.
- Installment Amount: Equal principal + interest installments to repay full loan on time. Eg. N1000 per month.
- Security/Guarantee: Group guarantee acts as collateral. Co-borrowers are liable for defaults.
- Prepayment Fee: Usually not allowed to avoid risks, some may charge small fee for early repayment.
- Penalty for Delay: Interest penalty charged if weekly installment missed, negotiate delays upfront.
- Life Insurance: Some banks provide life cover against death during loan period.
Loan Monitoring & Repayments
Making regular payments on time helps your credit score go up. This means you can borrow more money in the future.
But if you miss payments or pay late, it can make it harder for you and others in your group to get loans. So, always try to pay on time. It’s important for getting the most out of microfinance programs.
Proper monitoring ensures timely repayments:
- Weekly center meetings of Joint Liability Group for collection/verification of repayments.
- Home/work visits by bank staff to monitor loan utilization and business performance.
- Maintain passbook or digital savings records up to date with weekly repayments.
- Repay complete installment on due date to bank, coordinator or village collector.
- Inform bank in advance if any temporary repayment issues and resolve collectively.
- Proper records and receipts help tackle disputes and verify repayments if required.
Factors Affecting Loan Approval
While microfinance aims to promote financial inclusion, banks still have a risk of defaults to consider before each loan approval. Key factors evaluated during appraisal include:
- Livelihood Activity viability, scale, market potential and growth projections.
- Borrower experience, expertise and commitment to the economic activity proposed.
- Household financial management skills, existing investments and liabilities.
- Savings installment repayment history over previous cycles/loans if any.
- Social connections and dynamics within the Joint Liability Group.
- Credit history report from external credit bureaus if available.
- Macroeconomic conditions, local demands and risks in the target sector.
Loan Application Rejection
In some cases, loan applications may be rejected due to risks perceived during the appraisal process. Common reasons for rejection could be:
- Incomplete or insufficient application documents submitted.
- Proposed activity or business plan found unviable or risky.
- Doubt raised on borrower’s experience, commitment or management skills.
- Poor credit history of late repayments on existing or past loans.
- Adverse findings during verification like incorrect declarations.
- Irregular savings deductions or installment repayment habits.
- Negative group dynamics or internal disputes raised as red flags.
Conclusion: How to Get Loan from Microfinance Bank
Accessing affordable credit from microfinance banks can be truly empowering for low-income households and entrepreneurs. By understanding the processes outlined in this article, potential borrowers can effectively identify suitable microfinance institutions, prepare their applications and maximize their chances of obtaining a loan.