Microfinance best practice: Group Lending

According to a recent survey, the global microfinance industry is set to grow at a CAGR of 16.6% over the period of 2012-2016. One of the key contributors to...

Snehal Fulzele 11th February 2014

According to a recent survey, the global microfinance industry is set to grow at a CAGR of 16.6% over the period of 2012-2016. One of the key contributors to growth will be the focus on untapped markets. It is also expected to see many changes in the near future including the likelihood of formation of a credit bureau for microfinance institutions and improved access to capital leading to more individual loans. But group lending will continue to be a microfinance best practice for risk mitigation in the near future.

In this article we will evaluate group lending as a microfinance best practice from different perspectives including statistics from the past, pros and cons of the practice and the roadmap for the future.



The rationale 

Group lending was a model created to mitigate the risk of lending money to poor who could not offer any collateral. In this model, the money is lent to a group of people and making the group accountable for the repayments. So even in an event when a group member is unable to make the repayment for some time, the rest of the group has to make the repayments.group lending


Pros and cons

Pros and consAs with any model which involves more number of people, group lending also has its own pros and cons. Let us look at a few:


Pros

• Offers inherent advantage of risk mitigation. • The business owners are required to meet weekly to share their experiences and best practices which can help others to improve their businesses.

Cons

 

The model is built so that the group repays the loan if someone in the group is unable to repay. If the group synergy is absent this may lead to tension within the group.



Statistics speak

While the rationale behind the group lending model sounds reasonable, do the statistics support the rationale? Or as is the case with history, do the facts contradict the rationale? A recent study of Kenyan microfinance industry data reveals that the mean proportion of loan delinquency is indeed lower under group lending.



Roadmap for future

Individual loans have been on the rise in the recent past. Although the trend may continue with MFIs getting better access to capital, group lending model will continue to be an integral part of the microfinance industry even in the near future. Following are a few recommendations for the MFIs to further improve their group lending practices:

  • Community driven nomination for group membership: Some MFIs already follow a group lending model where members of a community form the groups themselves. But there are also MFIs which involve themselves in the formation of the groups. There is no clear indication about which one of the two is a better model. However, the former model, at least in principle, helps mitigate the risk further as the community members would know who is less likely to default.  Since the group has to repay even if a member defaults, the group would ensure that membership is not misused.
  • Training linked lending program: A few MFIs around the world have linked a training program in essential business skills to the lending. This helps in reducing the gaps in the skillset, abilities and to some extent the motivation within a group and thereby improving the group synergy. While there may be additional costs involved in this training-linked lending model, such empowerment will help mitigate the risk significantly.



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