Case: BUYANTANSHI VILLAGE BANKING GROUP

Buyantanshi Village Banking Group was established in $2020$ and has been in existence for

the past four years. Beginning from humble beginnings, the group has grown exponentially

and now boasts of a membership of over a two hundred active members. The average savings

figures have grown to tens of thousands of kwacha's and it is not uncommon for members to

borrow in the hundreds of thousands of Kwacha's. Being a village banking group, the lending

procedures are informal and not complicated. This is what attracts many members that want

to access credit facilities quickly without the hassles that they would experience from the

formal credit providers like commercial banks. The return on savings for members is far

above the retum on any investments with the formal financial providers, with some village

banking groups reporting returns in excess of $100$ percent per annum. This return is far higher

than that of comparable formal investment alternatives such as fixed deposits, treasury bills,

currency trading, real estate and stocks. Interest charged on loans is also much higher than for

similar products with the formal credit providers and can be as high as $120$ percent on an

annual basis. The high interest rate charged on loans can be attributed to the elevated credit

risk inherent in informal groups like village banking where there are no formal lending

standards. It is not uncommon for such village banking groups to experience high default

rates and losses due to the absence of collateral as a condition for accessing the loans.

Buyantanshi Village Banking Group would like to reduce this credit risk.

Required:

You have been engaged as a consultant by Buyantanshi Village Banking Group. Your

assignment is to design a credit lending policy manual for the group. The lending manual

will help the village banking group to reduce its credit risk. Your recommendations should

include best lending practices appropriate for such types of groups. You must also be

cognisant of the need to reduce the credit while not sacrificing the flexibility of the village

banking group.