Draft:Soft Microfinance

Soft Microfinance Soft microfinance.[1] is an innovative model within microfinance that focuses on borrower welfare and social impact over profitability. While traditional microfinance has succeeded in providing financial access to millions of low-income individuals , its interest rates and rigid repayment terms can place a significant burden on the most economically vulnerable. In response, soft microfinance, which emphasizes low-interest or zero-interest loans with flexible repayment terms. This approach specifically aims to accommodate low-income borrowers, creating a more humane and sustainable framework for financial empowerment.[2]

Origins and Philosophy Soft microfinance is an alternative model within the field of microfinance that emphasizes borrower welfare, social responsibility, and financial inclusion. Unlike traditional microfinance,[3] which often charges double-digit interest rates, soft microfinance focuses on providing low-interest loans coupled with social support services and capacity-building initiatives. This approach is particularly designed for low-income borrowers, including women, in developing economies, with the goal of fostering economic growth and financial resilience without exposing participants to high debt burdens.[4]

ATM Ridwanul Haque, proponent, a Bangladeshi development professional and founder of an NGO that specializes in microfinance, health, and water initiatives, began promoting soft microfinance as an alternative model. Ridwan's vision for soft microfinance includes single-digit service fee,[5] flexible repayment terms, responsible funding, and additional social services to help borrowers improve their economic situations in a sustainable manner . This welfare-oriented philosophy underpins soft microfinance, setting it apart from other microcredit models. The philosophy of soft microfinance centers on principles of ethical lending, transparency, and community upliftment. Rather than seeing microfinance as a business opportunity, soft microfinance views it as a means to empower individuals economically and socially, ultimately contributing to the well-being of entire communities.[6]

Principles of Soft Microfinance The principles behind soft microfinance go beyond financial transactions; they are rooted in ethics and community well-being. Key features include:

1. Operational Cost Only: Microfinance institutions (MFIs) will charge borrowers only a single-digit service fee[7] to cover operational costs, without any additional fees or interest. Since most of these MFIs operate on a not-for-profit basis, there is no intention of generating income through lending .[8]

2. Reduced Interest Rates: Soft microfinance offers loans at significantly reduced, single-digit interest rates (service fee), or in some cases, zero interest. This lowers financial strain, allowing borrowers to invest more income into improving their lives rather than servicing high-interest debt.[9]

3. Fair and Transparent Lending: Soft microfinance emphasizes ethical practices, with no hidden fees or exploitative terms. Transparency in lending ensures that borrowers are not entrapped in debt cycles, fostering trust and accountability.[10]

4. Socially Responsible Funding: The model directs funds toward beneficial activities that support community welfare. Borrowers are encouraged to invest in socially acceptable ventures, contributing to broader social goals.[11]

5. Flexibility in Repayment: Soft microfinance provides flexible repayment[12] options, often with customized repayment terms or grace periods. This allows borrowers to first establish stable income streams, reducing the risk of default and alleviating financial stress.[13]

6. Capacity Building and Support Services: Soft microfinance extends beyond lending by providing resources like financial literacy training, mentorship, and business support. In some cases, borrowers also receive asset transfers, such as livestock or seeds, helping them create sustainable income[14] sources. Family members will receive health and education support as well, if needed. This holistic support empowers borrowers to thrive both financially and socially.[15]

7. Inclusion of the excluded: Unlike traditional microfinance, soft microfinance specifically targets the ultra-poor, marginalized communities, who often lack the assets or stability required to participate in conventional programs. By focusing on these individuals, soft microfinance opens new pathways for those traditionally excluded from financial services.[16]

8. Social Collateral: Rather than requiring physical assets as collateral, soft microfinance relies on social collateral, using community networks to support loan guarantees. This system leverages trust within the community, making loans accessible to those without physical assets and strengthening social ties.[17]

Model Overview Soft microfinance incorporates several stages to ensure responsible lending and community empowerment. The model begins with community consultations, followed by the establishment of a local management committee, member selection, savings plans, loan assessments, and disbursements. Ongoing support, such as financial literacy training, business support, and flexible repayment options, is provided to enhance borrower success and well-being.[18]

Key Steps in the Implementation of Soft Microfinance 1. Community Consultations and Trust-Building The first step in launching a soft microfinance program involves consultations with local leaders, community members, and women as stakeholders. This engagement aims to build trust, ensure community support, and establish a shared understanding of the program's objectives. Inclusion of women in these discussions is prioritized, recognizing their significant role in economic and social development within their communities.[19]

2. Establishment of a Local Development Committee A committee comprising respected local leaders, women and other community members is formed to manage and oversee the microfinance initiative. This committee bridges the gap between the organization and borrowers, monitors savings and loan activities, resolves issues, and facilitates capacity-building efforts, thereby enhancing transparency and local ownership.[20]

3. Member Selection and Orientation Following the committee's formation, potential borrowers from low-income families are identified and invited to join the program. An orientation session introduces applicants to the program's principles, expectations, and benefits, along with guidance on financial literacy. This stage ensures that members understand their roles and responsibilities within the program.[21]

4. Mandatory Savings Mechanism Each participant is required to deposit a small, weekly savings amount, ranging from $0.30 to $0.50. This interest-free savings serves as a financial cushion and encourages a culture of disciplined saving. Members can withdraw their savings at any time, offering flexibility and financial security during emergencies.[22]

5. Loan Assessment and Customization Needs assessments are conducted collaboratively by the organization's staff and local committee, who evaluate each borrower's financial requirements. Loan proposals are tailored based on individual needs, such as small business expansion, agricultural investment, or urgent household expenses. Loan amounts are designed to align with each borrower's repayment capacity to reduce the risk of default.[23]

6. Eligibility Verification A separate team conducts thorough investigations to verify the eligibility of each borrower, considering factors like financial capacity, savings history, and business feasibility.This assessment ensures that only those with genuine need and repayment ability are approved, supporting the program's long-term sustainability.[24]

7. Loan Disbursement and Service Charges Approved borrowers receive loans ranging from $100 to $1,000, with repayment terms typically extending over a year or more, in accordance with local regulations. A minimal service charge is applied to cover administrative costs, with any surplus either refunded to borrowers or donated to MFIs charity fund. Additionally, borrowers contribute 1% of their loan to MFIs charity fund that supports community welfare, fostering mutual aid and social responsibility.[25]

8. Support Services and Ethical Business Practices Borrowers receive additional support services as needed, including financial literacy training, business development, and access to social services like health and education. A team from the microfinance organization ensures that funds are not used for businesses considered harmful or socially unacceptable, promoting ethical and responsible business practices.[26]

9. Flexible Repayment and Grace Period Borrowers are granted a grace period of 21 days or more before repayments commence, giving them time to stabilize their finances. Repayments are collected on a weekly, monthly, or other agreed-upon schedule, making financial management easier for borrowers and reducing financial stress.[27]

10. Savings Withdrawal and Loan Repayment Incentives After loan repayment, borrowers may withdraw their accumulated savings in full, providing a financial cushion or capital for reinvestment. Borrowers who delay repayments beyond the term pay a 1% penalty on overdue amounts, encouraging timely repayment while remaining considerate of borrowers facing genuine difficulties.[28]

11. Repeat Loan Opportunities Successful borrowers become eligible for larger loans, supporting their progression from smaller investments to more sustainable ventures over time. This approach fosters ongoing participation in the microfinance program and aids in the gradual financial growth and stability of the borrowers.[29]

Impact and Potential of Soft Microfinance Soft microfinance, as envisioned by Ridwanul Haque, represents a pivotal evolution in financial inclusion, centering social impact over financial gain. By reducing financial pressure on borrowers and providing support services, it empowers marginalized communities and fosters sustainable economic development. With the right backing, soft microfinance could become a vital tool in reducing poverty, promoting entrepreneurship, and advancing social welfare.[30]

However, challenges remain, particularly in achieving financial sustainability[31] and scaling the model. Soft microfinance requires significant funding to maintain low or zero interest rates, making it dependent on support from governments, donors, and stakeholders committed to social development.[32]

  1. ^ http://Soft%20microfinance
  2. ^ .Haque, ATM Ridwanul (23 October 2024). "Soft Microfinance, a Welfare Financing". Daily Sun. Retrieved 24 October 2024.
  3. ^ http://traditional%20microfinance
  4. ^ Due to the nature of the contract, microfinance is not appropriate for farmers who faced by seasonal variations in income are unable to make regular repayments. Hence most borrowers from microlending institutions are self-employed (Gine 2003).
  5. ^ http://single-digit%20service%20fee
  6. ^ Haque, ATM Ridwanul (23 October 2024). [http://"Soft%20microfinance,%20a%20welfare%20financing" "Soft microfinance, a welfare financing"]. The New Nation. Retrieved 26 October 2024.
  7. ^ http://single-digit%20service%20fee
  8. ^ .https://www.newagebd.net/credit/Ridwanul%20Haque.
  9. ^ Example drawn from CGAP (1998).
  10. ^ Jansson and Wenner (1997).
  11. ^ World Bank (2002).
  12. ^ http://flexible%20repayment
  13. ^ Gallardo, Outtara, Randhawa, and Steel (2003).
  14. ^ http://create%20sustainable%20income
  15. ^ Kaboski, J., and R. Townsend, 2003, Policies and Impact: An Analysis of Village-Level Microfinance Institutions, University of Chicago, mimeo.
  16. ^ Example drawn from Fernando (2003).
  17. ^ Example drawn from Forster, Greene, and Pytkowska (2003).
  18. ^ .Aslanbeigui, N., Oakes, G., & Uddin, N. (2010). Assessing Microcredit in Bangladesh: A Critique of the Concept of Empowerment. Review of Political Economy, 22, 181-204.
  19. ^ Keddy, J., S. Nanjundan, et al. (1988). RSIE, Development of Rural Small Industrial Enterprise, Lessons from Experience, Netherlands Government.
  20. ^ Jayo, B., S. Rico, et al. (2008). Overview of the Microcredit Sector in the European Union.EMN Working paper. 5.
  21. ^ Jayo, B., S. Rico, et al. (2008). Overview of the Microcredit Sector in the European Union.EMN Working paper. 5.
  22. ^ Gosses, A., N. Molenaar , et al. (1989). Small Enterprises, New Approaches, DGIS, Operations review unit, Ministry of Foreign Affairs, The Netherlands.
  23. ^ INHolland, C. v. M. (2008). The Microfinance sector in selected countries and their regulatory frameworks (Pakistan, Uganda, Bolivia, France).
  24. ^ INHolland, C. v. M. (2008). The Microfinance sector in selected countries and their regulatory frameworks (Pakistan, Uganda, Bolivia, France).
  25. ^ Gosses, A., N. Molenaar , et al. (1989). Small Enterprises, New Approaches, DGIS, Operations review unit, Ministry of Foreign Affairs, The Netherlands.
  26. ^ UNDP (2006). Building Inclusive Financial Sectors for Development.
  27. ^ Little, I. M. D., D. Mazumdar, et al. (1987). Small manufacturing enterprises : a comparative study of India and other economies. New York ; Oxford University Press [for] the World Bank,.
  28. ^ .Microcredit Regulatory Authority (MRA) (2014). An Overview of Microcredit in Bangladesh. Microcredit in Bangladesh.
  29. ^ .Microcredit Regulatory Authority (MRA) (2014). An Overview of Microcredit in Bangladesh. Microcredit in Bangladesh.
  30. ^ Adams, D., Grahan, D. and J.D. Von Pischke, 1984, eds., Undermining Rural Development with Cheap Credit (Boulder, CO: Westview Press, 1984);
  31. ^ http://financial%20sustainability
  32. ^ .Al Mamun, C. A., Hasan, M. N., & Rana, A. (2013). Micro-Credit and Poverty Alleviation: The Case of Bangladesh. World Journal of Social Sciences, 3, 102-108.