Starting a virtuous circle with loan guarantees

24 Aug

We initiated repayments on loan guarantees this weekend and have returned nearly $20,000 in repayments to individual loan guarantors. This is a major milestone for us.

During repayments the amount of guarantee that is returned is proportional to the percentage repaid on the loan tranche from the bank to the microfinance institution. Thus in case of the earliest loans of June 2009 the repayment is around 40% of the guarantee amount, while for the latter loans in May/June 2010 the lowest repayment is around 9%. Loans in the intermediate period will have repayments between 9% and 40%.

To many individual loan guarantors, the repayments are a validation of the guarantee model. There is also a validation of the guarantee model at the human impact level that I am most delighted to share.

A year back at the peak of the financial crisis Ajiwika, our first microfinance partner was finding it very difficult to raise funds from banks. Based on United Prosperity’s guarantee support a large Indian bank agreed to lend a little over $200,000 over a course of a year to Ajiwika. Since then the total guarantees we have raised are a little over $100,000 making around $180,000 in loans helping more than 900 families directly. With the guarantee support, Ajiwika built a relationship with this bank and their credit history with the local banking system. Further since a large bank was lending to Ajiwika, other banks looked at them a lot more favorably. This expanded the circle of trust and since then seven other banks have approved $3.1 million in loans to Ajiwika that can be disbursed to around 17,000 entrepreneurs. Additionally Ajiwika, has also been able to reduce its cost of borrowing from banks and has reduced the interest rate it charges from its borrowers.

This is just a glimpse of the ‘Virtuous Circle’ that all of us have together started helping so many entrepreneurs and their families many of them known to us through their stories on the UnitedProsperity.org website and many more whose stories of courage and fortitude are similar.

Thank you for all starting the ‘Virtuous Circle’ making a difference to the lives of so many people.

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