Currently, AMK offers five different credit products: three group-guaranteed loans without any physical collateral requirement, one individual loan product that requires physical collateral and one personal guarantee, and an emergency loan option that is restricted to clients who have completed at least six months with AMK and with existing balance outstanding for individual loans and group members. The group loans have three distinct repayment modalities: end-of-term, installments and credit-line, while the individual loan has to be repaid in monthly installments. The emergency loan provides a flexible end-of-term repayment option.
AMK’s flagship product is the solidarity group loan product, which offers flexible repayment terms where clients can borrow and repay at any point during the cycle. AMK’s end-of-term repayment product is delivered to members through a solidarity group lending methodology. These village solidarity groups are called Village Banks (VBs) and constitute the group loan delivery mechanism; they are in effect a “Village Association” or “Village-level client group”.
The potential clients self-select themselves into solidarity groups of 4 to 6 members and these, in turn, are organized into VBs of 4 to 12 groups (or 20 to 60 clients). Being part of a self-selected solidarity group entails that three to five other villagers trust the loan applicant to let him/her join their solidarity group. All loans are guaranteed by the respective group members and appraised and approved by AMK’s Client Officer (CO) and the Village Bank President (VBP) before the disbursements take place in the presence of the group members and AMK’s Area/Branch Manager.
Solidarity Group Methodology: Clients, Group Leaders, VBPs
In order to be part of a group, the potential client needs to fulfil the following conditions: (i) must be willing to be part of a solidarity group and offer moral guarantee for each other; (ii) should have at least one economic activity in the household; (iii) no two members in one group can be from the same family or household; (iv) cannot have existing (outstanding) loans from other microfinance institutions, programs, banks or moneylenders. There are no requirements for gender but women are encouraged to participate and currently represent 86% of AMK’s client base. Each group nominates a group leader who is in charge of ensuring member attendance to meetings, troubleshooting and liaison with VBP, CO and other members.
A VBP is the management representative of the VB, is elected through secret ballot by all members of the VB and is paid an incentive depending upon the VBs’ performance. VBPs are responsible for helping COs in organizing collection and repayment meetings; informing COs in advance in cases of potential non-payment and following-up with delinquent clients; solving membership related problems; and ensuring that all clients have been enrolled according to group and VB formation criteria.
EoT-VB loans sustain high demand due to the flexible repayment terms and are expected to remain AMK’s main loan product in the near future. In order to reduce the covariance risk associated with EoT-VB loans and respond to other client types, AMK has developed (and continues to explore) credit products for households whose livelihoods depend on small scale manufacturing, service or trading activities through the introduction of fixed installment options for loan repayment: the individual loans. For those households with irregular cash-flows but good repayment history, AMK is introducing a credit of line option.
The pre-loan training provided by AMK to potential clients covers AMK’s policies; origin and areas of operations; terms and conditions of microfinance products (such as repayment requirements, fees, penalties and disqualification for non-payment, loan sizes, and moral guarantees -or physical guarantees), and the roles and responsibilities of the clients, group leaders and the VBP.
Group loan: End of Term (or EoT-VB)
The End Of Term Loan for Village Bank members (EoT-VB) is delivered through VBs and granted for any purpose as long as the household has a lumpy (seasonal) cash-flow pattern from its livelihood activities. The maximum term is 12 months and the interest rate is at 3% per month on outstanding balances. Interest is paid monthly and the capital can be repaid at any time during the loan cycle, usually at the end. There is no penalty or fee for partial or full pre-payment of the loan principal.
The maximum loan amount of the first loan is R300,000 (US$70) and two subsequent increments of R150,000 (US$37.5). From their third loan (or 2 years) they can apply for the maximum ceiling, which is equivalent to US$150. All loans are subject to a flat processing fee of 0.5% of the loan amount that is collected before loan disbursement. . Payments start one month after the loan is disbursed and take place only during the monthly VB meeting. In case of late repayment, there is a penalty of 12% per annum (or 1% per month) on the principal balance.
Group loan: Installments (or Installments-VB)
The Installment loan for VB members (Installment-VB) shares exactly the same characteristics as the EoT-VB loan except the interest rate and the repayment modality: instead of paying interest monthly and the principal at the end of the term, I-VB loans require a monthly payment of fixed principal and declining interest amounts, with a monthly interest rate of 2.8%.
Additionally, the maximum loan term remains at 12 months but the term must be clearly decided with the client before sanctioning the loan. Therefore, the only distinction between this product and the EoT-VB loan is the client’s household cashflow pattern: households that have a regular cash inflow that is sufficient to meet repayment obligations are encouraged to borrow in installments. This product was introduced in January 2004 and the interest rate was reduced to 2.8% per month in January 2005.
Credit Line for Village Bank members (or Credit Line-VB)
The Credit Line–VB is restricted to VB members who have completed two loan cycles with AMK. As with other group loans, no physical collateral or guarantors are required. Clients can borrow and repay a number of times in any single cycle up to an approved borrowing ceiling. Clients must borrow any amount equal or less than their approved ceiling for the first time within the first 90 days from the approval date. After that, they have complete freedom of when and how much to borrow or to repay; the only condition is that the principal balance must be zero on the final payment day or before. The maximum ceiling of the loan is R600,000 (US$150) with terms of at least 3 months but a maximu of 24 months.
The interest is 3% per month and the amount to be paid as interest varies based on outstanding principal balances. All loans are subject to a flat processing fee of 0.5% of the agreed loan ceiling, payable at the time of the first disbursement. There are no fees or further requirements, except in the case of late repayment, where a penalty of 12% per annum (or 1% per month) is charged on the principal balance.
Individual loan: Installments (or Installment-I)
The individual loan targets the underserved lowest segment of rural entrepreneurs, who want to borrow amounts between $250 and US$500. By contrast, most other MFIs/banks concentrate on higher value individual clients and lend higher amounts (around $500 and over, and reaching up to US10,000 in the case of personal loans sanctioned by some MFIs/banks).
The installment loan for Individual clients (Installment-I) is provided to rural/semi-rural individual entrepreneurs (individual clients located in rural markets). The maximum term is 18 months and the interest rate is of 3% per month for the first three cycles (or two years) and 2.5% per month thereafter. Repayment takes place in monthly installments with fixed principal and declining interest and there is no penalty for complete or partial pre-payment of the loan principal.
The maximum loan amount is equivalent to US$500. There are two up-front fees: a flat processing fee of 0.5% and a savings deposit of 2% of the loan amount. In case of late repayment, there is an additional penalty of 1% per month on the principal balance as soon as the loan becomes overdue. In addition, Installment-I loans require physical collateral and one personal guarantor. Also, the process of identifying individual clients is significantly different from that of VB clients: a greater degree of scrutiny and control is undertaken to ensure that client identification is appropriate.
Emergency Loan
The new Emergency Loan is restricted to group or individual clients who have completed at least six months with AMK and with existing balance outstanding for individual loans and group members. This product is designed to help clients to cover emergency related expenses – usually medical expenses in case of sudden illness or accidents as well as funeral expenses in case of a death in the family. The client can request the emergency loan from the Client Officer in the village or the office staff (Area or Branch Manager) at the branch and disbursement takes place within four working hours of receipt of the request.
The maximum loan amount is R400,000 or B4,000 (US$100) and the maximum term is 10 months. No physical collateral is required but clients need to present one personal guarantor (who can be a family member). This product carries a 2.5% monthly interest on the outstanding loan principal that has to be cleared on or before the end of maturity date. There are no fees for this loan, except a 1% late payment fee. Family members are eligible to apply for an emergency loan on the behalf of the client.