VILLAGE BANKING

MICRO CREDIT THROUGH VILLAGE DEVELOPMENT ORGANIZATIONS

CED SECTOR SAFWCO

Hyderabad

MARCH 3, 2009
Table of Contents

CHAPTER ONE - INTRODUCTION

CHAPTER TWO - VILLAGE DEVELOPMENT ORGANIZATIONS

2.2 Advantages and Disadvantages of VDOS
2.3 The major weaknesses of VDOS

CHAPTER THREE - ESTABLISHING THE MODALITIES

3.1 Goals
3.2 The Process
3.3 Guiding Principles
3.4 Eligibility Criteria
3.5 Sensitization
3.6 MOU
3.7 Role of SAFWCO
3.8 Role of VDO
3.9 Committees of SAFWCO Structure
3.9.1 Program Advisory Committee
3.9.2 The program Funds Committee
3.10 Committees of Village Bank Structure
3.10.1 Executive Committee
3.10.2 Credit Committee
3.11 Communication Language
3.12 Establishing Policies Specification
3.13 Screening of Clients Application
3.14 Operational Cost
3.15 Operation Policies and Finance System
3.16 Eligible Beneficiaries of Loans

CHAPTER FOUR - SETTING THE OPERATIONAL NORMS OF THE SCHEME

4.1 Amount of Loan

4.2 Loan Approval Authority
4.3 Purpose and Use of Loans
4.4 The Use of Collateral
4.4.1 Group Guarantee
4.4.2 Use of an Individual Guarantor
4.5 Linking of Credit to Savings or Margin Requirements
4.6 Repeat Loans and Multiple Loans
4.7 Disbursement and Repayment Schedules
4.8 Emergency Fund/Loan Insurance
4.9 Registration Fee
4.10 Setting Interest Rates
4.11 Loan Recovery
4.12 Graduation of Beneficiaries

CHAPTER FIVE - PROCEDURE

5.1 Applications (expression of interest)
5.2 Appraisal
5.3 Approval for Partnership
5.4 SAFWCO Orientation
5.5 Implementation Plan
5.6 Approval for IP Plan or Modification
5.7 Opening of Bank Account
5.8 Preparation of Clients Cases
5.9 Cases Verification and Processing at SAFWCO
5.10 Transfer of Funds
5.11 Debit Voucher and Receiving of Funds Slip:
5.12 VDO entries of unit no in their LDS
5.13 receiving of final debit voucher
5.14 Preparation for Repayment
5.15 Reconciliation Process of Finance
5.16 Print Out
5.17 Print out at VDO
 CHAPTER ONE

INTRODUCTION

SAFWCO is currently running its Programs in twelve Districts of Sindh with the overall
objective of social and financial development. Retail Micro Finance Program works with
Community Organizations and with SAWFCO own model of Village Development
Organizations called VDOs This programs offers multiple products and SAFWCO now
intends to focus on achieving the following Goals:
Transformation of VDO to village banking
Developing these Micro Finance Organizations to evolved MFI
Establish a sustainable saving and credit programs through these VDOs
Build the capacity of VDOs to be able to run the Micro Credit Program autonomously and
to enhance their role in poverty alleviation
Advocate for the role of Micro Finance Organizations in development process
Over the past decade SAFWCO has been trying to find the best possible approach that addresses
poverty effectively, ensures sustainability and contributes to the empowerment of the poor.
Evaluation of Micro Finance Programs shows that positive results have been achieved so far in
terms of the impact on poverty alleviation. The key elements that contribute to this are the degree
to which the system is responsive to the needs of the poor and the degree of participation and
ownership by the poor. The types of other support services (training and advice, gender
awareness) provided to the poor have their own contribution to poverty alleviation. However
there are also difficulties in this approach. Flexibility of the system sometimes works against the
sustainability of the new program itself . The resource require for village banking is building
the capacity of VDOs to manage the system makes replication easier. This task is further
complicated by the significant differences in capacity between female and male VDOs and their
adoptability of the system required for any successful MF organization.
Intensive training for VDO in various areas including participatory methodologies is needed to
put direct impact on the quality of the intervention and the end result. The compilation of strong
database both qualitative and quantitative is essential for a more accurate measurement of impact
for proposed village banking.
SAFWCO’s micro Credit Program started in 1999 with the overall objective of alleviating
poverty in its area of operation with particular emphasis on women. The two major components
of the program are to strengthen the coping mechanism through building the capacity of VDOS
to assist their members. The other major component is to provide micro credit loans to the
community initiated VDOS to boost up the economical conditions in partnership with
communities, local government and NGOs.
In general Village banking concept through VDO seeks to implement alternative strategy for
addressing the financial needs of the poor through informal structures while at the same time
contributing to their role in development.
This paper focuses on the policy , procedure , of village banking or VDOs as is alternatively
used in this paper.
 CHAPTER TWO

VILLAGE DEVELOPMENT ORGANIZATIONS

VDOs are village based organization and were first introduced by SAFWCO, to provide a
common platform for the folk men to collaborate and joint their hands for social and financial
development.
The major role of VDOs is therefore to provide a social collateral for financial assistance in
form of loans to attach uplifting of the villagers. Few VDOs are registered under welfare act as
CBOs and have by-laws, which are more or less very similar. The by laws include the rights and
duties of members and penalties imposed on members incase of failing to fulfill duties.

VDO membership requires regular contribution varying from less than 30 rupees per month
among the poorest .Some very poor VDOs may not have regular contributions at all . Similarly
the amount paid to members varies from few hundred to few thousands. Equal contributions are
made from all members and equal assistance is provided for all.
VDOs mobilize a lot of saving in the form of contribution and financial asset deposited in Bank
and in the hands of the VDO leaders called Executive Committee. According to a rough survey
estimate of the monthly contribution in different VDOs indicates that 1000 to 2000 rupees is
collected every month in VDO from its members.
Membership in VDOs is generally open for any one who can pay the registration fee and the
monthly contribution. Usually it is the head of the household who becomes a member of VDO. A
rough estimated survey shows that 70% of the households of village are members of a VDO.
This is mainly because of the importance attached to being a member of many VDOs on the one
hand and the benefits drawn from the financial assistance in form of social collateral from credit
committee comprising of five responsible and evaluated person from VDO on the other. The size
of members of VDO varies depending on various factors such as the age of the VDO and the
area of coverage. Big VDOs can have from tens to hundreds members, while there are smaller
VDOs of mainly women members with a membership size of up to 50.

2.2 ADVANTAGES AND DISADVANTAGES OF VDOS

The key features of VDOs that make them suitable for Village banking/MFO in general and
community based micro financing in particular are the following :
1. VDOs are voluntary self initiated mutual support units established as permanent platforms for
socio-economic development which is considered as one factor that contributes to sustainability
of Micro Finance Organizations.

2. Extensive experience in collection of recoveriesand imposing financial discipline for

repayments of loan among members .

3. High degree of stability in membership composition and location .

4. VDOs are highly valued in the society and are able to exert powerful social sanction .

5. Possession of authority to arbitrate disputes among members or reconcile quarreling members.

6. Women form their own VDOs as well . which is very amazing to watch in the society where
social mobility and decision making process is denied for female.

2.3 THE MAJOR WEAKNESSES OF VDOs

1. The big VDOs are too large in size and are difficult for the targeting the poor because of varying
interests among members.

2. Management of especially big VDOS is not always transparent and therefore there is corruption
and mismanagement which is a challenge for SAFWCO to introduce MFFP.

3. Leadership in most VDOs is more or less permanent nature and are not necessarily
Democratic .

4. Small VDOS like women VDOS have limited vision and in most cases prefer to remain
informal.

5. There is no management ,financial , operational systems in VDOs, although a less degree of

systems can be seen , but as a whole not fully in compliance of standardized systems.
Conclusion
In addition to these weaknesses which some conclude make VDOs difficult for village banking,
there are also others who argue that any outside interference with VDOs is leading to their
disintegration and ultimately will destroy the image of SAFWCOs model when an outsider
funding agency will support them in line of credit ,keeping in view , if SAWCO does not enter
into any financing partnership program . The less radical ones argue that VDOs may be good for
MFFP interventions that attempt to build on what they already have i.e. micro finance services .
These critiques overlook the dynamism and the changes that VDOs have gone through over the
past decades.

The VDO function has therefore increased to providing the social and financial assistance to
their members even this has started attracting SAFWCO CED attention to the concept of village
banking as VDO with passage of time have devised nominal policies , management system and
are ready to be transformed into village banks which will be quite a new experience in Pakistan
for promoting rural organizations to autonomous Micro credit practioner organizations.
 CHAPTER THREE

ESTABLISHING THE MODALITIES

3.1 Goals

The overall Goals of the Village banking is to address the needs and improve the conditions of
the poor with in the community by working with Village Development organizations and
structures, in villages . Through this funding, VDO will strengthen the coping mechanisms of
the villagers, enhance the their role , contribute to improved financial services , increase income
generation activities,, facilitate inter agency cooperation and linkages, promote participation and
share experiences and development of organizations to root level in decision and planning level.

The two major components of the proposed program are to achieve these objectives:
1. Saving and credit activities through VDOs/CBO
2. Training(capacity building)

3.2 THE PROCESS

VDOs are association that SAFWCO piloted and successfully introduced this model , by means
of their transformation into village banking / micro finance organization , SAFWCO will have to
add flexibility in its process of funding them by means of lack of high capacity in them ,

3.3 GUIDING PRINCIPLES

SAFWCO will:
initiate a participatory dialogue with the community to assess their specific credit
needs. This dialogue should be broad, rather than narrowly focused on the issue of
micro-finance.

review stability of finance system; the system of financial regulation (as it will
impact on what we are allowed to do); the nature of local markets; and general
 macro-economic conditions.

carry out to examine how formal and informal financial arrangements are satisfying
the needs of the population.

Ask these types of questions that might be asked are: Where are the gaps to be filled
and opportunities for the future? What is the geographic scope of services? What is
the functional scope of existing systems (e.g. only savings or only credit for social
purposes)? What are the conditions of access to financial services? What are the
wider transaction costs of getting this access? What are the interest rates?
Undertake a baseline socio-economic survey to develop an in-depth understanding of
the social spectrum of the program area.

3.4 ELIGIBILITY CRITERIA

VDOs shall be informed to be registered under any Govt Act so that to have legal recognition .
Although this process will take time for implementation ,but it must be kept in mind the legal
recognition is must , without which SAFWCO will not transform VDO.
It shall be communicated to VDOs , the general criteria shall comprise strong VDO having a
huge membership , honest and ardent having al least two years experience of existence in VDO
and shall comprise all the conditions as per mobilized and described by social development
sector of SAFWCO.

3.5 SENSITIZATION

Once the partner VDO is identified, the next step is to conduct meetings with VDO leaders and
members in order to determine the appropriateness of the Village banking in the VDO and to
negotiate the type and size of contributions they will have to make, the modus operandi of the
village banking concept, the support required to make the Village banking successful.
Sensitization is necessary for local constituency and VDOs who are crucial in facilitating the
process. A great deal of sensitization on the objectives of the program is necessary before
winning the trust of these VDOs. Sensitization shall be focused on saving and credit and the
role of VDOs in assisting their members. A VDO should qualify for Village banking if all or the
majorities of its members agree to join the transformation process .

3.6 MOU
An MOU will be signed between PO and SAFWCO to undertake following modalities;

3.7 ROLE OF SAFWCO

Role of SAFWCO in development of village banks into MFIs shall be planned by keeping in
mind following guiding principles which could guide us in designing the proper planning for
VDOs:
SAFWCO will:
Carry out thorough study of potential VDOs before transformation process
Consider all these VDOs as lack of management system , financial system, internal
and external auditing system.
Consider them as naked seed that has to go under soil .
Play its role as institution to teach VDOs for micro finance
Guide throughout the development phase.
Use local language in its corresponding and planning whatever suit to these VDOs
Facilitate in preparation of credit polices , format and necessary documents.
SAFWCO will not:
Consider that any system is placed in the VDOs
Play donor like role in VDOs development
Conduct any strong monitoring of VDOs during first year of partnership
Deal VDOs as the other partner shall be dealt in its first year partnership
Use any typical acronyms and international language in VDOs meeting and its
operation.
Role of VDO
Role of VDO in development of village banks into MFIs shall be :
VDO will:
Form a committee in its structure to facilitate the transformation process and to
coordinate and follow the suggestions by SAFWCO
Carry out thorough study of potential clientele and its area
 Try to adopt/absorb management system , financial system, internal and external
auditing system under the guideline provided by SAFWCO
Follow the Guidance provided by SAFWCO throughout the development phase.
Sort out the educate local Human Resource and will communicate with SAFWCO
Show their keen interest and engage themselves for policy making process
provided by SAFWCO i.e. Facilitate in preparation of credit polices , format and
necessary documents.

3.9 COMMITTEES OF SAFWCO -STRUCTURES

SAFWCO MFFP will be comprising of following structures to run the development process:

3.9.1 THE PROGRAMME ADVISORY COMMITTEE(PAC)

Representation by the nominated members of the SAFWCO CED sector under program
management of CED sector preferably Deputy General Manager, Manager Operation , Area
Managers , they will provide technical, administrative and organizational expertise and
suggestions once in the month so as to able to provide operational guidance to the program
operation. The program advisory committee shall have General Manager CED as head acting
as the Head of the committee.

3.9.2 THE PROGRAM FUNDS COMMITTEE(PFC): decides on the Volume of Line of

credit transfer to POs, and the number of installments. Ideally, it should be as broad-based as
possible to represent Governing Board members . The role of this committee will be to give
approval for finalized decision put by MFFP team.

3.10 COMMITTEES OF VILLAGE BANK STRUCTURE

Village Bank will exercise autonomy in its management , finance , operation and expenses where
as in the first year of partnership village bank will decide and form their planning and procedure
with SAFWCO keeping in view the prevailing trends in micro finance.
Although under Village Bank Partner Program , VDOs will exercise freedom of policy making ,
but SAFWCO will put their Micro Finance retail experience to guide these villagers to form a a
kind of policy which can lead towards successful Micro Finance organizations, there shall be
joint meetings with general body and villagers on many issues connected with Micro finance
program and with the collective understanding between the entities the policy will be finalized
for three years . Any change or modification in its operational policies will be done with prior
permission from SAFCWO until partnership remains validated.

3.10.1 EXECUTIVE COMMITTEE

Executive committee shall be assigned to work as operation team of VDO under village Bank
Partner Program. The option shall be left for the VDOs to determine who shall be in the
Executive committee. But it is observed that most VDO have elected Executive committee
members who have better educational , community influence and responsibility of interacting
among community

3.10.2 ADVISORY CREDIT COMMITTEE

The Advisory Credit committee should have five members to review and recommend loan
requests by members. This committee will act as advisory board to Executive Committee
Normally, the base groups of 5-7 members will undertake the first peer review of loan request
and shall provide the necessary advice. The Advisory Credit Committee will be able to further
modify these loan requests. The President and General Secretary of the Executive committee
together with three other elected members should constitute the committee. Normally, there
would be no compensation for the time of the committee members. The Village Bank would
bear the necessary expenses of the committee, which is likely to be nominal

3.11 COMMUNICATION LANGUAGE

Any corresponding or coordination with Village Banks including all the official , accounts and
debit vouchers will be conducted in Sindh language so that they may adopt with full absorption.

3.12 ESTABLISHING POLICIES SPECIFICATION

Most of small VDOs can draft written rules and regulations for the first time guiding their social
activities .I n addition specific rules and regulations shall also put be in place with assistance of
SAFWCO team to run the Micro Finance Program. The VDOs and their members shall
determine the loan size, the repayment period, the interest to be paid, penalties for late payment,
the loan guarantee system, the measures to be taken on defaulters and minimum saving. VDOs
are also responsible for following up on use of funds by their members.

3.13 SCREENING OF CLIENTS APPLICATION

Written loan applications will be submitted to the VDO Executive committee. The loan
application shall be screened ,approved and loan will be disbursed on the VDO monthly . Such
things as the purpose of the loan which in some cases need not be for productive purposes, the
ability of the applicant to pay, the urgency of the need, the economic status of the member and
the experience (if it for business) as well the personal guarantee shall be discussed before loan
is approved. It is recommended to the VDOs, potential poor members shall be given priority
in getting loans.

3.14 OPERATIONAL COST

During the firs year of partnership , Executive Committee shall work voluntarily with free of
cost , this strategy will entail two types of benefits to VBPO , I) Governing Body will know the
operational needs and philosophy which will guide them during transition to evolution .
2) Due to low administrative cost , VDO will develop its sustainability trends.

3.15 OPERATION POLICIES AND FINANCE SYSTEM

SAFWCO will train VDOs staff and Finance Secretary /accountant with local language so as
to enable them manage their financial systems . SAFWCO MFFP team will guide and promote
documentation formats along with other management systems injections to VDO with gradual
transfer strategy .SAFWCO will also provide Field Accountant Facilitator FAF, who will
make all disbursement and record financial accounting in his account books during his
monthly visit to VDO at the time of disbursement and at the time of depositing recovery until
and unless VDO become capable of doing so. VDO will be charged 1500 per month for this
service as SAFWCO has formed Commercial Micro Finance Funding Program.

3.16 ELIGIBLE BENEFICIARIES OF LOANS

The Village Banks provided by SAFWCO-supported Line of credit could be extended to
a wide-range of beneficiaries. For example, both individuals and groups (or associations) could
be eligible.
Important issues arise when one considers group versus individual loans. There are two
considerations. First, lending to groups has been found to be a cost-effective method of
providing credit in a wide range of cases. Using groups to disburse credit lowers the cost of
credit delivery and can simplify loan procedures and paperwork. The use of groups can
enhance the bargaining power of the poorest and can also open up new opportunities to
individual members, while at the same time provide the program with a guarantee for timely
loan repayment.
Second, one must distinguish between lending to a group for group-based activities (e.g. a
sewing group) and lending to a group to finance individual activities (e.g. a group of spice
sellers, who work independently). In some cases, considerations of economies of scale and the
bulkiness of the potential investment activity may warrant the provision of relatively large,
group loans. In such cases, ceilings for groups are usually a multiple of individual ceilings
depending on the number of members in the borrowing group. Group activities need to be
carefully appraised and closely supervised. Management of group-based loans may be
problematic if the groups lack cohesion and the necessary business skills. SAFWCO's
experience with group loans is successful although new EDP provides individual loans too.
Therefore much needs to be exercised by the field staff in promoting group loans.
Only one client from one household will be entertained by Village Bank.
 CHAPTER FOUR

SETTING THE OPERATIONAL NORMS OF THE SCHEME

4.1 Amount of loan

The amount of the loan (in terms of a minimum or maximum) can act as a filter mechanism, as
can other attached conditions (such as use or method of disbursement). A low ceiling has often
been successfully used to channel an appropriate share of credit funds to poorer beneficiaries.
Loans should not be so small as to be ineffective, but, at the same time, loans in excess of
requirements may lead to waste and default. Loan amount should be linked to the type of loans,
and whether group or individual. Loan ceiling should be periodically adjusted to account for
price changes and changes in activity profile of priority clients. In addition, together with the
average investment requirement, the determination of loan amount/ceiling should be linked to
the margin requirement defined below. Authentic micro finance practice shall be excercised by
village banks as for the first cycle of loan , loan size shall not exceed beyond Rs.10,000/= for
the second cycle the loans shall not exceed beyond Rs.15000, where as in third cycle loans size
shall not exceed beyond 20,000 in the four cycle the loan size shall not exceed beyond
Rs.30000/=/

4.2 Loan approval authority

Loan approval authority should be decentralized, and peer review of loan amounts by the clients
should be encouraged. This will reduce the costs of service delivery and could simplify
loan procedures, reducing the time it takes to process applications. Credit Committee will
recommend the clients cases to the Executive committee which will be signing authority for the
disbursement of cheque.

4.3 Purpose and use of loans

The loan amount offered by Village Bank shall be on productive purpose , or pertaining to
income generation activities like TV /CD player for Hotels which come under the non
productive investments but indirectly contribute to the income generation.

4.4 The use of collateral

Loans should be collateral free as far as possible, as a requirement to provide collateral could
be deterrent for credit delivery to priority target groups. A number of alternative options may
be considered as collateral:
4.4.1 Group guarantee - in the case of default, the group might be liable for repayment. Or the
group as a whole may not be eligible for further loans. Group guarantee is usually appropriate
for short-term loans.

4.4.2 Use of an individual guarantor - many variations are possible such as, a recognized
outsider of an standing acceptable to the group on account of means, income,asset, elective
office, government affiliation, religious or social leadership and the like. The decision regarding
the type of guarantor could be linked to the amount of loan or borrower type on a graduated
scale to be determined by the group members.

4.5 Linking of credit to savings or margin requirements

Many micro-finance schemes require the borrower to make a contribution before a loan is
disbursed. Often this requirement (called a margin requirement) shall be set as a percentage of
the loan amount, often in the range of 12% or 20%. In other words, for every Rs.100 of
investments the borrower must put up at least Rs.1. Such margin requirements shall contribute
as increasing borrower commitment to repayment. However, they should be applied flexibly
depending on the nature of business and the borrower. In addition, they may not always be
appropriate for every type of loan, e.g. for emergency loans.
Margin requirements/ savings shall be the form of obligatory savings linked to loans. For
example, a client may be forced to save 12% of the value of the loan. Again the rationale is that
the client feels more committed to the loan. An additional advantage is that it increases the
capital base(Revolving Fund) of the program. Beneficiary groups themselves can determine the
amount of obligatory saving.
Given the importance of savings, some programs may feel that savings should be obligatory for
clients, but voluntary thrift habits should also be encouraged. There should be concerted effort
by the field staff to gear the incentive structure and fine-tune it continuously in order to promote
voluntary savings. Some of these are mentioned in the box below. There could be others and it
is important that when we design incentives, we do not establish a bias against the poorest, by
placing more emphasis on the volume (as opposed to the regularity) of saving:
1. Savers should be rewarded with interest payments comparable to financial institutions.
2.) Adjust loan amount to the amount of savings using the latter as collateral
3.) Allow repeat loans to clients with better savings records
4) Allow multiple loans to relatively large savers
5.) Be flexible about loan purpose (use of loan) for clients with better savings records

4.6 Repeat loans and multiple loans

Repeat loans should be extended to clients, who repay on time. Poorer groups may need repeat
loans to take them above the poverty line. However, the number of repeat loans to be given is
an important decision to be taken. The program should provide repeat loans within the bound
of its resource constraint which points to the importance of augmenting credit funds by
mobilizing internal savings and linking up with other capital sources. Generally, the number of
repeat loans should also be linked to the size of each loan. Multiple loans should be considered
as inappropriate practices in our prevailing culture of micro finance industry and hence shall not
be allowed for practice in young ages of village banks.

4.7 Disbursement and repayment schedules

In terms of Fund disbursements to Village Bank, the schedule of disbursements should be

related to the pattern of IP of the organization. This is equally true for the disbursement of loans
to an individual.
We have already said that the procedure for fund disbursement should be simple and fund
delivery should not be unduly delayed, although necessary conditions for disbursement must be
satisfied. The most important condition is the absorptive capacity of the Village Banks, their
performance regarding fund utilization and accounting .
The actual monthly fund requirement shall be determined by the Executive Committee and shall
communicate the same to SAFWCO timely before it gets delay to the clients. With regard to
loan repayment, , 3 to 12 months should be considered as repayment periods for loans under
SAFWCO-MFFP.

4.8 Emergency fund/loan insurance

Given the inherent risk involved in all types of activities in SVillage Banks Micro Finance
Program , especially those in livestock and crops, some kind of insurance scheme is desirable.
One option would be to establish an across-the-board emergency fund at 2% of the original
value of the loan, to be deducted at source. Setting such an insurance premium would
compensate the program for the overall risk of default. In the case of animal loans, the
borrower would have to furnish the amount in cash at the time of loan disbursement. For
grains, the amount could again be deducted at source. However, such a fund may not be
appropriate in all cases, such as for emergency loans. Instead of deciding on an across-the-
board rate, it may be decided that insurance premiums are set with greater attention to
individual circumstances.

4.9 Registration Fee

Village banks need relatively high interest rate to streamline their program in its initial age,
hence the other sources also be used to make it feasible and work, like all other mfi practice ,
Village banks shall also charge 3% of registration fee on total loan size at the time of
disbursement from the client….

4.10 Setting interest rates

Programs in the past have experienced a number of conflicting pressures when setting interest
rates. Often we may feel that by setting a high interest rate, we are not helping our target group,
who is poor. However, by setting a low interest rate, the real value of the loan fund is often
eroded and the program stands little chance of ever being independent. If we start from the
premise of long-run sustainability, we will need to aim for interest-rates that will
generate sufficient income for the program to financially and economically sustainable. Without
such interest-rates, it will be impossible for the program to become independent of SAFWCO’s
financing. At the same time, we should remember that the poor households might be facing
even higher effective interest rates on other sources of credit. The preferable interest rates shall
not low down from 25% flat per annum.In practice this means that SAFWCO programmes
should try to achieve a positive real rate of interest, that is interest rate should exceed the
projected rate of inflation. In addition, the

4.11 Loan recovery

A viable Micro finance Program of Village Bank should include measures to ensure loan
recovery on time and keep late payment and loan default to a minimum. Village Bank Executive
Committee should consider some of the following:
1. Use moral cohesion and group solidarity and pressure to cultivate good repayment discipline.
2. Appraise investment proposal adequately before disbursement.
3. Avoid giving loan in excess of requirements.
4. Ensure that loan is utilized productively.
5. Estimate carefully the cash flow cycle to determine repayment schedule.
6. Deliver loans on time in accordance with business requirement.
7. Consider interest rate rebate(in form of bigger loan size for second cycle) for timely payment
of loans and impose penalty for late payment without valid reasons.
8. Good accounting system should be established for both lenders and borrowers. Loan
passbooks are helpful.
9. Alert borrowers in time about due date for repayment so that borrower can take necessary
steps to make the payment.

4.12 Graduation of beneficiaries

SAFWCO staff shall be called upon to take necessary steps to assist clients to graduate out of
the Village Bank micro finance program and link up with SAFWCO EDP product.
 CHAPTER FIVE

PROCEDURE

5.1 APPLICATIONS (EXPRESSION OF INTEREST)

At SAFWCO end
SAFWCO will publish EOI in daily Newspaper or will send them by courier services, where as
for VDO it is not necessary to submit proposal , they encouraged by simply writing request
application for partnership to SAFWCO in local language

At CBO/NGO end
CBO/NGO can forward an application for partnership in form of simple request in local language
or in form of proposal to the SAFWCO Liaison Office or directly to Head Office.

5.2 APPRAISAL

At SAFWCO end
Application is entertained by evaluating the situation analysis , organizational structure, its
objective , strong leader ship and whether it can deliver retail micro finance services or not
.Proper format is available from SAFWCO , the team assigned makes a texture report of one or
half page that applicant CBO/NGO is potential or not , its HR is enriched to carry out retail MF ,
etc.
Selection of Partner VDOs through Appraisal
Once the target VDOs are selected the next step is to conduct appraisal for more than once in
entire month preferably following variables should be examined:

1. Governing Body
2. Management system
3. Years of establishment,
4. Membership size,
5. Resources in cash and kind,
6. Membership fee and regular or occasional contribution,
 7. Financial Analysis
8. Profiles of the membership, etc.
9. Book Keeping
10. Mobilizations skills
11. Influence in village/community
12. Inclination to commercial Micro Finance

At CBO/NGO end
CBO/NGO are informed by the SAFWCO that they are to be evaluated on so and so , day , date
and time . VDO takes necessary initiatives for evaluation i.e. informing dissemination to
Executive Committee , its staff , field , completing its record , presentation etc.

5.3 APPROVAL FOR PARTNERSHIP

1. At SAFWCO end
After appraisal report which will be in summary form shall be send to Executive Board/ person
authorized for partnership approval.

2. At VDO end
VDO shall informed that their application for partnership is approved in the meeting of Executive
Board and promissory note is required for VDO to under take according to the IP plan.

3. Agreement :Drawing up of an agreement between SAFWCO and the VDO, laying down
terms and conditions of credit grant.

4. Rules and regulations of credit operation are decided by the VDOs.

5.4 SAFWCO ORIENTATION

At SAFWCO end
After the approval from SAFWCO , the VDO team comprising of four person shall be invited to
come at SAFWCO head Office and learn the process. Orientation shall cover the main area of
funding program , IP plan , Repayment , methodology , terms and conditions ,priorities of
SAFWCO.

At VDO end
VDOs team shall comprise of Chief Executive , Accountant , Field Officer and one from
governing body or from program staff.

5.5 IMPLEMENTATION PLAN

Necessary orientation of IP plan shall be delivered to Partner VDO as how to , where to , how
much to , include in the plan .

At VDO end
Soon after the orientation partners shall be advised to make IP plan and there by submit to the
SAFWCO , where as specification and limitation have already been discussed during orientation
of SAFWCO in previous meeting.

5.6 APPROVAL FOR IP PLAN OR MODIFICATION

At SAFWCO end:
After the submission of IP plan SAFWCO shall see whether it is in compliance with their policies
or necessary modification is to be incorporated. If IP plan is feasible and is in compliance with
SAFWCO polices, a letter in writing shall be sent to the VDO for information.

5.7 OPENING OF BANK ACCOUNT

At SAFWCO end
VDO shall be advised to open different bank account with combined title of SAFWCO and VDO
i.e. SAFWCO – VDO CED for financial transaction of accounts .

At VDO end
Soon after the arrival letter of account opening , the VDO arranges the governing body meeting to
pass the resolution for bank to open account where two signatory are authorized to operate the
account.

5.8 PREPARATION OF CLIENTS CASES

At VDO end
VDO shall start for clients preparation and the process shall take its course at the requirement of
two dimensions i.e. 1) SAFWCO requirement 2) VDO requirement
SAFWCO never binds any partner VDO in its operational policies where as they offer
suggestions for standard policies , and shall entitle it as the total discretion of partner VDO to
make whatever they feel best but in accordance with the main principles of micro finance retail.
SAFWCO feels that with the evolution course , partner will be able to make their own policies
and procedures. Where as guideline is all time available at SAFWCO for policy formulation.
1) Partner VDO shall be required to send photocopy of CNIC , NIC and photo copy of appraisal
form of partner VDO ( if it is formed , usually all the partner VDO most likely to have
formed their loan appraisal forms).
2) Entries of Clients on Debit Voucher , ( Debit Voucher format shall provided by SAFWCO and
is enclosed herewith)
3) VDO stamp and signature on every page of debit voucher there by email soft copy and hard
copy to SAFWCO
4) Request for total funds required for partner for the current month is sent to SAFWCO.

5.9 CASES VERIFICATION AND PROCESSING AT SAFWCO

At SAFWCO end :
SAFWCO shall receive soft and hard copy of debit vouchers along with the request of funds
from partner VDO. SAFWCO shall adopt following procedure:
SAFWCO shall:
1) enters the clients names in to their MIS for verification and justification
2) MIS issues Unit No to the clients .
3) after Unit No issuance by MIS , the Unit No shall be written by hand on column of the
hard copy of debit voucher
4) Revenue stamp will be adhered on it sent and dispatched to concerned VDO.
5.10 TRANSFER OF FUNDS

At SAFWCO end
According to the IP plan and request from partner VDO, SAFWCO shall transfer funds to bank in
to VDO account.

5.11 DEBIT VOUCHER AND RECEIVING OF FUNDS SLIP:

At VDO end
A debit voucher shall be sent to partner VDO showing fund receiving which is to be signed and
sent to SAFWCO for acknowledgment ( format is attached).

5.12 VDO ENTRIES OF UNIT NO IN THEIR LDS

At VDO end
a) VDO shall resume the process of loan by its operational policy ( following process may differ
but graduate and mature partners undertake following procedure) :
b) Making of loan summary of group or individuals clients
c) Making of cheques by crossing on “ or bearer”
d) Financial preparation for credit voucher and with draw statement , clients receiving and
agreement etc
e) Making of loan disbursement sheet or manual loan disbursement register.
f) Taking signatures of clients on revenue stamp on hard copy of debit vouchers .
g) Dispatch the original copy of debit vouchers to SAFWCO and keep photo copy of it at their
official record.
h) Partners make due sheets of borrowers.

5.13 RECEIVING OF FINAL DEBIT VOUCHER

At SAFWCO end
As soon as VDO sends the DV of the current month Finalized original debit vouchers of the
month along with the clients CNIC or NIC , appraisal form is consolidated and kept as official
record in filing system of SAFWCO.

5.14 PREPARATION FOR REPAYMENT

At SAFWCO end
SAFWCO on 1st of every month shall dispatch MIS print out to the partners for their information
of outstanding balances at individual clients. (specimen is attached)

At VDO end
VDO shall carry out recovery process in following manner (obligatory for graduate and mature
partner)
a) Recoveries shall be collected from clients where as in their receipt , Unit No shall be
mentioned to clarify the recovery position.
b) Shall Record the recoveries at loan recovery sheet/ dues sheet
c) Shall Record the entries in four column excel sheet (specimen is enclosed herewith)

d) Shall email the copy of recovery sheet to SAFWCO

e) Shall transfer the collection amount to SAFWCO account by cross cheques / Demand draft.
f) Shall send letter of transfer of collected amount as recovery to SAFWCO duly stamped by
CEO.
g) VDO Dispatch Bank statement to SAFWCO showing the balance

5.15 RECONCILIATION PROCESS OF FINANCE

At SAFWCO end
SAFWCO shall reconcile the whole process of recovery with the immense care and prudential
approaches. SAFWCO shall carry forward the recovery process by following procedure:
SAFWCO shall:
a) verify from the bank statement of SAFWCO Head office account that due amount has been
sent
b) verify from MIS for due and collected/deposited amount
c) get excel emailed sheet of recovery from partner
d) record it in its MIS system
e) SAFWCO verify the withdrawal of VDOs/NGOs requested amount for disbursement from
bank statement of partner account.

5.16 PRINT OUT

At SAFWCO end
SAFWCO after recording recovery entries in its MIS, again is proposed to send the print out to
the partners.

5.17 PRINT OUT AT VDO

At VDO end
Partners can verify that their sent amount to SAFWCO which has been recorded / entered in the
MIS and can get help from this print out for setting out scores of outstanding.
 Application Expression of Interest

Appraisal conducted Appraisal of applicant

Information for Approval for

partnership partnership

Partner Team visit to Orientation on funding

SAFWCO for orient : program

Making and
Approval of IP plan
submission of IP plan

Opening of bank Directions for Bank

account account opening

Submission of client Verification and

cases in DB format approval for fund

Fund transfer , unit No

Fund and DB receiving allocation and DB
dispatch

Receiving of amount and

Receiving of cases
cases submission CNIC
etc) to SAFWCO and DB

Preparation of MIS for

Receiving of MIS for
Recovery and dispatch to
recovery partner

Recovery deposit to Receiving of recovery

SAFWCO account from partner and entry
along with list of in MIS