Village Banking Explained

Village banking is a banking system that is implemented in economically challenged environments in order to help those that cannot get loans from traditional financial institutions. This is a type of microcredit that is popular in certain regions of the world. Here are the basics of village banking and how it works for those involved.

Support Group

The basic structure of a village bank is much like a support group. As many as 30 or 40 people from a village get together and talk about financial matters. They will have regular meetings in which they convene and discuss the issues associated with the village bank. Typically the support group is made up of the heads of households from homes in the community.

Within this group, individuals can ask for loans from the village bank. If you attend meetings regularly and you are in good standing with the rest of the group, you should be able to get a small loan. The loans that are issued by village banks are typically very small compared to regular financial terms. These loans are traditionally for less than $100.

The loan is made to the individual that requests it and then they have a specific amount of time that they have to pay it back. They will make regular payments to the village bank until it is repaid.

Lack of Collateral

With this type of loan, they often do not require any kind of collateral. Collateral is usually not require because most of the individuals and the organization do not have anything to offer as collateral anyway. Instead of collateral, all of the members of the organization provide cross guarantees on everyone else's loans. If a loan was not repaid, the individual that took out the loan would be embarrassed to remain in the community. This type of loan utilizes social pressure instead of traditional collateral to enforce the loan. 

Goals

The primary objective of village banking is to provide assistance to individuals that are in extreme levels of poverty. The hope is that by providing them with small loans, they can engage in business transactions that will eventually increase their wealth. Many larger banks in these regions will help provide financing for village banks. They will give them the money that they need at the market interest rate at the time. 

Rates

The rates that are eventually charged to individuals that borrow from a village bank are above 25% in most cases. While this is much higher than what other areas of the world pay for interest, it is still less expensive than the other options that these people have. The only other sources for money are lenders that operate with the same type of structure as a payday loan or title loan. These entities might charge as much as 300% interest on short term loans. When faced with the choice, the village banking model makes more sense for individuals who are in this situation.


Check your 3 Credit Scores here for Free.

blog comments powered by Disqus