Lecture 1

Question 1

Money-Guards

Answer 1

• One way to mitigate these drawbacks is to form a financial relationship with somebody else.
• “Money-guards” are people trusted to hold money safely on one’s behalf—are common.
• They may be neighbours, friends and relatives, or employers.
• But this is unreliable.

Question 2

4 Money Management Tools

Answer 2

1. Money-Guards
2. ROSCA means Rotating Savings and Credit Association
3. Credit Cooperatives: ASCAs or Credit Unions
4. Microfinance Institutions (MFIs)

Question 3

ROSCA: To Discipline

Answer 3

• ROSCA means Rotating Savings and Credit Association.
• Saving on your own is hard.
• Saving with a ‘money guard’ helps impose some distance but not enough discipline.
• Informal finances are flexible and convenient, but they also lack of discipline.

Advantages

• ROSCAs are relatively disciplined. * ROSCAs never require cash to be stored. * At each meeting the money goes straight from the depositors to that meeting’s taker. * Swiftest and cheapest

Disadvantages

ROSCAs become riskier * The longer they run, * The more members they have, and * The bigger the amounts transacted.

Question 4

Credit Cooperatives: ASCAs or Credit Unions

Answer 4

• ASCAs (Accumulating Savings and Credit Associations) and credit cooperatives are modification of ROSCAs that allow some participants to mainly save and others to mainly borrow.

Credit cooperatives differ from ROSCAs in several ways:
* Members do not have to wait their turn to borrow * Participants (savers and borrowers) are all shareholders * Key decisions (interest rates, loan size etc.) are taken democratically

Question 5

Microfinance Institutions (MFIs)

Answer 5

MFIs have been much better able than banks to approximate the convenience of informal finance.

• They have done this in various ways: * Close to their clients, * Repayments were made easy by being small and frequent—often weekly and sometimes even daily, * People could borrow for a common business (or similar) purpose, * Short-termed.

Question 6

Different forms of MFIs

Answer 6

• Non-regulated: Friends and family, money lenders, savings collectors, traders, ROSCA and ASCA.
• Member-based: CVECA (Caisse villageoise d´épargne et de crédit autogérée), FSA (Financial Service Association), SHGs (Self Help Groups), co-operative financial institutions.
• Non-Government Organizations (NGOs).
• Regulated: NBFIs, state-owned banks, postal banks, co-operatives, specialized MFI banks, insurances, transaction banks, commercial banks

Question 7

Loan Delivery Methods: Group Method

Answer 7

As MFIs provide collateral-free loans, group methodologies help in creating social collateral (peer pressure) that can effectively substitute physical collateral

• Self-Help Groups (SHGs): A SHG is an association of generally up to 20 members, preferably from the same socio-economic background.
• Joint Liability Group – Grameen Model: This is the most accepted and prevalent microfinance delivery model in the world today. * This model has a high focus on standardization and discipline.