An interesting initiative adopted by our partner MFI, Association for Rural Development of Yilong (ARDY) written by PlaNet Finance China in-field intern Laura Silver. To see more related postings, check out our intern blog at http://pfcinternship.blog.com/

One thing I’ve particularly enjoyed learning about at ARDY is their model of mutual fund groups. These groups, which are started in various villages by ARDY, are each composed of roughly 100 people from the town. Each one of these people is responsible for contributing his or her own money. While the amount varies by group, the typical amount is 500 RMB (or roughly US$70). This money is then pooled and loaned out in the community, usually to members of the mutual fund group itself. The amount is loaned at a 10% interest rate with biweekly repayment, though the length of the loan varies depending on the group and the person. At the end of a year, the mutual fund members are able to take back their initial investment plus the interest that has been earned on it, or to continue with the group. The group is monitored by three officials, elected from within the membership, who are trained and supervised by ARDY. They also receive a small stipend for their work, paid initially by ARDY but later out of group funds as the group matures.

This model really intrigues me, as it not only offers microfinance loans to more villagers than ARDY thus far can reach on its own, but it also provides a very viable investment opportunity to other villagers. Additionally, it’s extremely low risk for the villagers involved. This is in part because the members select to whom the loans are dispersed, monitoring them and providing a strong group pressure, even though the loans are individual. It is also low risk because the operation functions like a joint-stock collaborative, meaning that the risk is spread across all members, so even if an individual were to default on his or her loan, each group member would suffer little to no personal hardship. ARDY already has 16 groups that operate under this model and has plans to set up new ones, as this model is abundantly replicable and easily sustainable.

The role of the local government is incredibly important. While these government officials have little involvement with the actual monitoring of the fund, it’s important to keep them “in the loop,” so to speak, as the influence they have in their various communities is enormous. In fact, as ARDY seeks to set up more mutual fund groups in other towns, their first activity will likely be to contact the local government officials for those towns so that they can help to spread the word about the new opportunity to the local villagers.