Micro-Credit
Things to Remember when Borrowing Money
Asia/Pacific Cultural Centre for UNESCO (ACCU)
When we need extra money, Micro-Credit can help us.
There are several occasions when we need extra money for living, such as...
for emergency situations, or
for meeting family needs,
for expanding family business.
What is Micro-Credit?
Rashid and Rajni, who are farmers, have too little
money to expand their farming activities. One
day, they asked Rita, a member of the farmers'
co-operative, for her advice.
Rita, I have heard that the
co-operative has something
called "micro-credit" that can
lend us money. Could you
tell me what it is?
Rita
Micro-Credit means small loans for people who need
money for self-employment projects that generate
income or for urgent family needs such as health
problems and education. It is meant to help improve
people's quality of life by lending them a small amount
of money for a short period of time. The characteristics
of Micro-Credit are....
The amount of money you
can borrow is not so much.
Rashid
Rajni
You need to pay it back in
a short period of time,
usually within a year at
most.
From whom can we borrow?
Borrowing from a money lender
There are various money lending institutions such as banks,
co-operatives, NGOs, and individuals. Since we have two
major sources in this village, I
will tell you about them, namely individual money lenders and
farmers' co-operative. In general, borrowing big money from
money lenders is risky. They
tend to lend money at high interest (additional money you
need to pay), and you have to
return big money. While, our
co-operative loans to you at
much lower interest.
Advantages
Disadvantages
・There is no limit on the
loan amount and borrow ing period.
・Interest rate is high.
・They request collateral *
for securing the loan.
*collateral: Land or other estates to guarantee the repayment of the loan.
Borrowing from
a farmers' co-operative
Advantages
・Interest rate is low.
・A group member may
support you if you have
difficulty.
・No collateral is necessary.
Disadvantages
・There is limit on the
loan amount and bor rowing period.
・You need to become a
member and pay a
membership fee.
Rita, I need some
money to buy new
seeds and fertilizer
for the next harvest. We are thinking of borrowing
money from the cooperative.
How
much do you think I
can borrow?
How much can we borrow?
Rashid, I think it is a good idea to borrow
money from our co-operative. They will lend
you money at a lower interest rate, compared
to money lenders. But, the amount of money
you could borrow from our co-operative
would be not so big, since you are still new to
the co-operative. Besides, you should limit
the amount according to the income you expect in the next harvest.
You mean that the
amount which I can
borrow should be set
according to my expected income and
credibility for paying
back?
Rajni, I think we
should go to the
co-operative office
and ask for the
"micro-credit".
Yes, that is their policy.
Once you gain credibility
among the co-operative
members, they could
lend you larger amounts.
Before we borrow money
Hello, Rashid and
Rajni. Welcome to
our co-operative!
Let me explain the system of
our "Micro-Credit". We can
lend you up to 1,000 Apees at
the interest rate of 2%
(2 Apees per 100) per month.
The maximum loan period is
one year. You may return the
loan little by little every month
or all at once at the end of the
borrowing period.
Before you borrow money you
should keep three important
factors in your mind. They are
the principal, interest rate, and
schedule of repayment of your
loan.
・Principal -the amount of
money you borrow.
・Interest rate -the percentage of money you need to
pay back in addition to the
principal.
・Schedule of repayment Duration and installment
plan of the loan. It affects
the total amount of your loan
at the end of the borrowing
period.
Before we borrow money
Terms to remember 1: Interest Rate
The interest rate is one important factor that makes a great difference in the total amount of your loan to be paid back. Suppose you
borrow 1,000 Apees for one month each from a money lender and
the co-operative, let's see the difference in total amount of your
loan by the interest rate.
Borrowed from
Money Lender
Principal
Interest
Rate
per month
Amount of
Interest
Total amount
of Loan
1,000 Apees
10%
(10 Apees per
100Apees)
100 Apees
1,100 Apees
20 Apees
1,020 Apees
Borrowed from
Farmers'
Co-operative
2%
1,000 Apees
(2 Apees per
100Apees)
Rajni, there is such a big
difference in the total
amount of the loan depending on the interest
rate.It seems far better to
borrow from the farmers'
co-operative.
Before we borrow money
Terms to remember 2: Schedule of Repayment
You should decide the schedule of repayment taking the following factors
into consideration: [1] when you get income from your product (harvest time)
and [2] how much you will get from
your harvest. There are two options
for a repayment schedule.
Option 1:
Paying back an installment every
week/month
Following this option, you pay back regularly little by little and you can avoid risk. Meanwhile, you need to have
a regular source of income to cover the payment.
Option 2:
Paying back the entire amount of loan at
the end of the borrowing period
Following this option, you pay pack the whole loan at
the end of the borrowing period. You need to have a
clear vision and plan of paying back all at once.
Before we borrow money
Terms to remember 3: 3Cs and Loan Agreement
Character
Capacity
"Character" means your
honesty and reliability to
pay back the loan. It is determined from your previous loan record and personal background.
"Capacity" means how
much loan you can comfortably pay back. Your income flow and any legal
obligations which may interfere with repayment of
the loan are looked into.
Capital
"Capital" means your
current available assets,
such as real estate, savings or investment that
could be used to pay
back the loan if your expected income should
be unavailable.
Reference: (1) Microcredit, Grameen Bank Home Page (2) The Virtual Library on Microcredit
Those 3Cs are the criteria that the co-operative apply when we
lend money. Besides the 3Cs, please read the Loan Agreement
carefully, if it is provided by the co-operative. It should explain all
the terms and conditions regarding your loan.
After we borrow money
Terms to remember 4: Ensuring Your Repayment
What should I do to ensure the
loan repayment?
Simply speaking, you try to increase your income and to keep
expenditure as low as possible.
The following is my advice.
If you make the best use of
the borrowed money keeping
cost-effectiveness in mind
and work hard, you can increase agricultural productivity and income.
You need to keep a record of money flow on
spending and income.
Spending includes agricultural equipment and
necessities for your daily
life, while, income is
what you get from selling the products.
It is quite helpful to know the
market price of your products
and the right time for selling.
It is also important to keep
the marketing cost of your
products as low as possible.
Whenever you have difficulty in paying your installment, you should immediately ask the
person in charge at the
co-operative.
Worksheets
Let's try to fill out the following sample worksheets. You will find that the difference
of interest rates affects the total amount of payment.Beside the sample worksheets, let's try to make your own sheet using actual currency, principal, interest
rate, and borrowing period.
Suppose you borrowed money under the following conditions:
Principal: 1,000 Apees
Schedule: paying back equal installment every month for 5 months
Worksheet 1
Interest Rate : 4 % (4 Apees per 100) per month
Total Interest : 200 Apees (40 x 5 months)
Monthly Installment : for Principal -200 Apees
for Interest
-40 Apees
Time period
Principal
Interest
Installment
Worksheet 2
Interest Rate : 10 % (10 Apees per 100) per month
Total Interest : 500 Apees (100 x 5 months)
Monthly Installment : for Principal -200 Apees
for Interest -100 Apees
Cumulative
1st month
2nd
Time period
200
40
240
240
200
40
240
480
2nd
3rd
3rd
4th
4th
5th
Principal
Interest
Installment
Cumulative
200
100
300
300
200
100
300
600
1st month
1200
5th
1500
Remember when you borrow money
・Choose a money lending institution which
offers low interest rate, such as farmers' cooperative and NGOs.
・Determine how much you are going to borrow according to how easily you can pay it
back.
・Plan the schedule of repayment suitable to
your income plan.
・Always keep a record of your expenditure
and income.
Guide for Utilisation
This booklet is a prototype version meant for local adaptation. Users
are encouraged to modify the contents, reflecting local conditions such
as currency, money lending institution, interest rate, borrowing period
and repayment schedule.
Title:
Micro-Credit -Things to Remember when Borrowing Money
Target:
Neo-Literate learners at self-learning level
Theme: Knowledge of Micro-Credit
Objectives:
・ To raise awareness of key issues about Micro-Credit
・ To let the learners know the safe and wise way of borrowing money
・ To encourage the learners to plan a loan management before and
after borrowing money
Application:
・Before distributing the booklet, discuss with learners whether they have experienced lack of money and how they managed the situation.
・Encourage them to talk about their knowledge and experience with Micro-Credit.
・Distribute the booklet to the learners and ask them to read through it.
・Lead a discussion on their findings about Micro-Credit in the booklet.
・Ask them to fill in the sample worksheets, and to prepare their own worksheet.
Illustrated by Eddie B. Handono (Indonesia)
Asia/Pacific
Cultural Centre for UNESCO (ACCU) 2000
C
[6 Fukuromachi, Shinjuku-ku, Tokyo 162-8484 Japan]
e-mail: literacy@accu.or.jp URL: http://www.accu.or.jp/litdbase
Planned and produced under the Asian/Pacific Joint Production Programme of
Materials for Neo-Literates in Rural Areas (AJP) in co-operation with UNESCO
Bangkok