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Things to Remember when Borrowing Money

         Asia/Pacific Cultural Centre for UNESCO (ACCU)
When we need extra money, Micro-Credit can help us.
     There are several occasions when we need extra money for living, such as...

                                                                 for emergency situations, or
for meeting family needs,

                                for expanding family business.
                                 What is Micro-Credit?
         Rashid and Rajni, who are farmers, have too little
         money to expand their farming activities. One        Micro-Credit means small loans for people who need
         day, they asked Rita, a member of the farmers'       money for self-employment projects that generate
         co-operative, for her advice.                        income or for urgent family needs such as health
                                                              problems and education. It is meant to help improve
         Rita, I have heard that the                          people's quality of life by lending them a small amount
                                                              of money for a short period of time. The characteristics
         co-operative has something
         called "micro-credit" that can                       of Micro-Credit are....
         lend us money. Could you
         tell me what it is?
                                                              The amount of money you
                                                              can borrow is not so much.

                                                              You need to pay it back in
                                                              a short period of time,
         Rajni                                                usually within a year at
                                                      From whom can we borrow?
    Borrowing from a money lender                                                                                            Borrowing from
                                                                             There are various money lend-               a farmers' co-operative
                                                                             ing institutions such as banks,
                                                                             co-operatives, NGOs, and indi-
                                                                             viduals. Since we have two
                                                                             major sources in this village, I
                                                                             will tell you about them, name-
                                                                             ly individual money lenders and
                                                                             farmers' co-operative. In gener-
                                                                             al, borrowing big money from
                                                                             money lenders is risky. They
                                                                             tend to lend money at high in-
                                                                             terest (additional money you
                                                                             need to pay), and you have to
                                                                             return big money. While, our
                                                                             co-operative loans to you at
                                                                             much lower interest.

                                                                                                                   Advantages                      Disadvantages
         Advantages                        Disadvantages
                                                                                                                •EInterest rate is low.         •EThere is limit on the
  •EThere is no limit on the •EInterest rate is high.                                                           •EA group member may            •@loan amount and bor-
  •@loan amount and borrow- •EThey request collateral *                                                         •@support you if you have       •@rowing period.
  •@ing period.              •@for securing the loan.                                                                i
                                                                                                                •@diffculty.                    •EYou need to become a
                                                                                                                •ENo collateral is necessary.   •@member and pay a
                                                                                                                                                •@membership fee.

*collateral: Land or other estates to guarantee the repayment of the loan.
Rita, I need some
                                       How much can we borrow?
money to buy new
seeds and fertilizer                                                     You mean that the
                       Rashid, I think it is a good idea to borrow                                Yes, that is their policy.
for the next har-                                                        amount which I can
                       money from our co-operative. They will lend                                Once you gain credibility
vest. We are think-                                                      borrow should be set
                       you money at a lower interest rate, compared                               among the co-operative
ing of borrowing                                                         according to my ex-
                       to money lenders. But, the amount of money                                 members, they could
money from the co-                                                       pected income and
                       you could borrow from our co-operative                                     lend you larger amounts.
operative.    How                                                        credibility for paying
                       would be not so big, since you are still new to
much do you think I                                                      back?
                       the co-operative. Besides, you should limit
can borrow?            the amount according to the income you ex-
                       pect in the next harvest.

                                                                         Rajni, I think we
                                                                         should go to the
                                                                         co-operative office
                                                                         and ask for the
                    Before we borrow money
                                                           Before you borrow money you
Hello, Rashid and                                          should keep three important
Rajni. Welcome to                                          factors in your mind. They are
our co-operative!                                          the principal, interest rate, and
                                                           schedule of repayment of your
                       Let me explain the system of        loan.
                       our "Micro-Credit". We can          •EPrincipal -the amount of
                       lend you up to 1,000 Apees at         money you borrow.
                       the interest rate of 2%             •EInterest rate -the percent-
                       (2 Apees per 100) per month.          age of money you need to
                       The maximum loan period is            pay back in addition to the
                       one year. You may return the          principal.
                       loan little by little every month   •ESchedule of repayment -
                       or all at once at the end of the      Duration and installment
                       borrowing period.                     plan of the loan. It affects
                                                             the total amount of your loan
                                                             at the end of the borrowing
                                   Before we borrow money
                                   Terms to remember 1: Interest Rate

                              The interest rate is one important factor that makes a great differ-
                              ence in the total amount of your loan to be paid back. Suppose you
                              borrow 1,000 Apees for one month each from a money lender and
                              the co-operative, let's see the difference in total amount of your
                              loan by the interest rate.

                                                                                        Rajni, there is such a big
                                                                                        difference in the total
                                                                                        amount of the loan de-
                                                                                        pending on the interest
                                                                                        rate.It seems far better to
                  Principal          Rate        Amount of   Total amount               borrow from the farmers'
                                  per month       Interest     of Loan                  co-operative.

Borrowed from                        10%
Money Lender    1,000 Apees      (10 Apees per   100 Apees   1,100 Apees

Borrowed from
Farmers'        1,000 Apees                      20 Apees    1,020 Apees
                                  (2 Apees per
Co-operative                       100Apees)
                             Before we borrow money
                      Terms to remember 2: Schedule of Repayment

You should decide the schedule of re-
                                            Option 1:
payment taking the following factors
into consideration: [1] when you get in-
                                            Paying back an installment every
come from your product (harvest time)
and [2] how much you will get from
your harvest. There are two options
                                            Following this option, you pay back regularly little by lit-
for a repayment schedule.
                                            tle and you can avoid risk. Meanwhile, you need to have
                                            a regular source of income to cover the payment.

                                            Option 2:
                                            Paying back the entire amount of loan at
                                            the end of the borrowing period

                                            Following this option, you pay pack the whole loan at
                                            the end of the borrowing period. You need to have a
                                            clear vision and plan of paying back all at once.
                                                        Before we borrow money
                                             Terms to remember 3: 3Cs and Loan Agreement

                                                      Character                                                                         Capacity

                                            "Character" means your                                                            "Capacity" means how
                                            honesty and reliability to                                                        much loan you can com-
                                            pay back the loan. It is de-                                                      fortably pay back. Your in-
                                            termined from your previ-                                                         come flow and any legal
                                            ous loan record and per-                                                          obligations which may in-
                                            sonal background.                                                                 terfere with repayment of
                                                                                                                              the loan are looked into.

                                                                                            Those 3Cs are the criteria that the co-operative apply when we
                                                                                            lend money. Besides the 3Cs, please read the Loan Agreement
                                                                                            carefully, if it is provided by the co-operative. It should explain all
  "Capital" means your
                                                                                            the terms and conditions regarding your loan.
  current available assets,
  such as real estate, sav-
  ings or investment that
  could be used to pay
  back the loan if your ex-
  pected income should
  be unavailable.

Reference: (1) Microcredit, Grameen Bank Home Page (2) The Virtual Library on Microcredit
             After we borrow money
       Terms to remember 4: Ensuring Your Repayment

What should I do to ensure the              Simply speaking, you try to in-
loan repayment?                             crease your income and to keep
                                            expenditure as low as possible.
                                            The following is my advice.

          If you make the best use of                                   You need to keep a re-
          the borrowed money keeping                                    cord of money flow on
          cost-effectiveness in mind                                    spending and income.
          and work hard, you can in-                                    Spending includes agri-
                                                                        cultural equipment and
          crease agricultural productivi-
                                                                        necessities for your daily
          ty and income.                                                life, while, income is
                                                                        what you get from sell-
                                                                        ing the products.

          It is quite helpful to know the                               Whenever you have diffi-
          market price of your products                                 culty in paying your in-
          and the right time for selling.                               stallment, you should im-
          It is also important to keep                                  mediately ask the
          the marketing cost of your                                    person in charge at the
          products as low as possible.                                  co-operative.
                            Let's try to fill out the following sample worksheets. You will find that the difference
                            of interest rates affects the total amount of payment.Beside the sample work-
                            sheets, let's try to make your own sheet using actual currency, principal, interest
                            rate, and borrowing period.

                          Suppose you borrowed money under the following conditions:
                          Principal: 1,000 Apees
                          Schedule: paying back equal installment every month for 5 months

Worksheet 1                                                        Worksheet 2
•@Interest Rate : 4 % (4 Apees per 100) per month                  •@Interest Rate : 10 % (10 Apees per 100) per month
•@Total Interest : 200 Apees (40 x 5 months)                       •@Total Interest : 500 Apees (100 x 5 months)
•@Monthly Installment : for Principal -200 Apees                   •@Monthly Installment : for Principal -200 Apees
•@                        for Interest  -40 Apees                  •@                        for Interest -100 Apees

Time period   Principal      Interest   Installment   Cumulative   Time period   Principal   Interest   Installment   Cumulative
 1st month                                                          1st month
                 200           40          240           240                        200        100         300           300

    2nd                                                                2nd
                 200           40          240           480                        200        100         300           600

    3rd                                                                3rd

    4th                                                                4th

    5th                                                                5th
                                                         1200                                                            1500
  Remember when you borrow money

  •EChoose a money lending institution which
    offers low interest rate, such as farmers' co-
    operative and NGOs.
  •EDetermine how much you are going to bor-
    row according to how easily you can pay it
  •EPlan the schedule of repayment suitable to
    your income plan.
  •EAlways keep a record of your expenditure
    and income.

Guide for Utilisation                                                     Application:
This booklet is a prototype version meant for local adaptation. Users     •EBefore distributing the booklet, discuss with learners whether they have experi-
are encouraged to modify the contents, reflecting local conditions such   enced lack of money and how they managed the situation.
as currency, money lending institution, interest rate, borrowing period   •EEncourage them to talk about their knowledge and experience with Micro-Credit.
and repayment schedule.                                                   •EDistribute the booklet to the learners and ask them to read through it.
Title:      Micro-Credit -Things to Remember when Borrowing Money         •ELead a discussion on their findings about Micro-Credit in the booklet.
Target:     Neo-Literate learners at self-learning level                  •EAsk them to fill in the sample worksheets, and to prepare their own worksheet.
Theme: •@Knowledge of Micro-Credit
Objectives:                                                               Illustrated by Eddie B. Handono (Indonesia)
•E To raise awareness of key issues about Micro-Credit                    •@Asia/Pacific Cultural Centre for UNESCO (ACCU) 2000
•E To let the learners know the safe and wise way of borrowing money      [6 Fukuromachi, Shinjuku-ku, Tokyo 162-8484 Japan]
•E To encourage the learners to plan a loan management before and         e-mail: literacy@accu.or.jp URL: http://www.accu.or.jp/litdbase
     after borrowing money                                                Planned and produced under the Asian/Pacific Joint Production Programme of
                                                                          Materials for Neo-Literates in Rural Areas (AJP) in co-operation with UNESCO