Group Lending Is The Way To Go!

Published on 8th January 2008

The Grameen case is inspiring because the first beneficiaries of the project were landless. Land beneficiaries in South Africa could benefit more from the Grameen lesson. The bank used the group-lending strategy to get loans to the poor people. “Social capital” was created using “peer-pressure” and this annulled the need for physical collateral that poor people do not have. The bank utilises what it calls ‘solidarity groups’(formed by the villagers using their local selection criteria), comprising of informal groups that apply for loans together while, simultaneously, its members act as co-guarantors of repayment and support each other to further their economic advancement.

The bank (Grameen) had also helped to bring more women into business, create thousands of new enterprises and introduce the financially illiterate to the banking system. While microfinance has long been used as a tool against poverty in areas like India, Bangladesh and other Asian countries, it however remains a largely untapped sector in Africa.

Advantages and Disadvantages of Group-Lending

The group-lending methodology popularly known as the Grameen model has got its advantages and disadvantages. However, replication of the model has proved successful in a number of countries. It is also prudent as regards “copying and pasting” models from other countries. What is important is to “copy-paste and modify” so as to acclimatize the models to local conditions. Social structures differ from one country to the next, so models that work elsewhere may not work in other settings. This could be due to different social, cultural, political and economic conditions.

Advantages

  • Improves the bargaining position of the group
  • Reduces loan transaction costs of both lenders and borrowers
  • The group will offer strong economic incentives to its members such as lower interest rates and price discounts on inputs among others
  • Promotes economies of scale in technical assistance
  • They may reduce risk of loan default due to joint liability among group members
  • Small-scale farmers gain access to credit where they are discriminated against as single borrowers
  • Credit unions can play a crucial role in mobilizing rural savings. These are useful since economic theory posits that savings create investments and this will act as a boost for rural development

Disadvantages

  • Problems associated with common ownership and team production
  • Non-cooperative behavior is common where social cohesion is not strong. This may be overcome by training people to appreciate the benefits of working as a team
  • Effort needs to be increased beyond the no cooperative equilibrium level
  • Myopic tendencies may result from cooperatives’ internal politics and this leads to moral hazard behavior, free riding, agency costs and horizon problems (that is members support policies favoring short-term gains in expectation that in the long run they may exit, leaving those who stay to carry the liabilities)

Although a multiplicity of challenges face group lending, it is important to develop services that are both responsive to the clients’ needs and are financially sustainable.


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