Determining Loan Product Features

Microfinance product for the Micro-entrepreneur

Microfinance product should … Respond effectively to client demand Simple and easily understood by the client; easily managed by the bank Cost efficient for both the bank and the client Generate enough revenue to cover costs and make a profit Ensure that clients are motivated to repay loans and become repeat customers Ensure that all risks to the bank are reduced, as much as possible

Loan Product Features CriteriaFeatures Borrower Eligibility Type of business Type of business – business that generate daily/weekly sales Age of enterprise Age of enterprise – operating for at least one year Residency Residency – resident of target area for at least two years Age Age – legal age, but not above 60 or 65 years old Credit Record Credit Record – no past due loan from any source

Loan Product Features CriteriaFeatures Purpose of Loan Working Capital Usually for Working Capital to support the client’s business Loan Size Borrower’s Cash Flow Loan amount based on Borrower’s Cash Flow 1 st loan not to exceed Php25,000 1 st loan not to exceed Php25,000 Repeat Loan : - Based on borrower’s cash flow and not to exceed 30% per cycle - Bigger repeat loan for borrowers with good repayment

Loan Product Features CriteriaFeatures Loan Term Short term – Short term – not more than one year Most common term are 2 – 3 months Loan term may be lengthened with each loan cycle, but usually does not exceed 12 months Payment Frequency Loans are paid usually in weeklyinstallments Loans are paid usually in weekly installments (daily payments only for special cases) Bi-monthly/Monthly payments Bi-monthly/Monthly payments – for clients with good credit records and bigger loan requirements

Loan Product Features CriteriaFeatures Interest and Fees: – Interest Rate 2 – 3% per month ; computed on flat-basis Usually 2 – 3% per month ; computed on flat-basis – Service Charges Fixed Amount (, or a percentage of the loan Fixed Amount ( P ), or a percentage of the loan (2- 3%) – Other Charges (usually deducted from Loan Proceeds) Notarial Fee Notarial Fee Credit Insurance Credit Insurance Documentary Stamp Tax Documentary Stamp Tax

Loan Product Features CriteriaFeatures Collateral Loans below a certain amount (e.g. Php25,000) - Loans below a certain amount (e.g. Php25,000) - Two Co-makers, Deed of Assignment of Deposits, or unregistered chattel mortgage of household assets Larger loans – Larger loans – Post-dated checks, chattel mortgage, real estate mortgage * Loan value should be determined by borrower cash flow and not the value of the collateral

Loan Product Features CriteriaFeatures Contractual Deposit additional guarantee May be required mainly as an additional guarantee for the loan deduct the minimum amount to open the deposit, 10% of the daily/weekly loan amortization Most common practice is to deduct the minimum amount to open the deposit, and to collect 10% of the daily/weekly loan amortization as additional deposit

Loan Product Features CriteriaFeatures Repayment Incentive Make amount of repeat loan dependent on borrower repayment performance and demonstrated capacity to pay (most common practice) Interest discounts Interest discounts for those who pay 100% on time Gift/Prize Gift/Prize for those who pay on time

Loan Product Features CriteriaFeatures Penalties for Late Payment Flat rate as penalty (e.g. Php10 – 100 per delayed installment payment) Percentage of the loan installment due (e.g. 2.5% per day) * Penalty should be large enough to discourage borrowers from delaying their payments as well as to cover additional costs that may be incurred by the bank in following up on delinquent payments

Loan Product Features CriteriaFeatures Loan Application Requirements Attendance to Client Orientation Seminar – Attendance to Client Orientation Seminar – pre- condition for loan application Basic documents should be easy to obtain (e.g. ID picture). Other documents (on request) - Business Permit - Barangay Clearance - Residence Certificate