The Poor Now Absorbing Wealth

Published on 7th February 2006

Micro-credit lending is essentially referred to as availing of loans to individuals through schemes that are specifically designed to meet their requirements. Primarily conceived by Prof Mohamed Yunus of the Grameen bank in Bangladesh, this form of financing has made lending to low resource earners a profitable, financially viable and sustainable business in many parts of Africa today.

 

Solidarity Group Lending is a model that adopts a group based approach to lending and mainly works through group pressure dynamics. It  is the best  method of lending to low income earners, who are generally lacking in collateral for ordinary loans and are ignored by the formal lending financial institutions. Due to the costly screening processes necessary when seeking loans from the formal lending institutions, low income borrowers requiring small loan amounts are usually excluded from the credit market. The group lending scheme works for them because group members themselves become legally and financially liable to each other, ensuring mutual guarantee and insurance hence substituting for the actual physical security.

 

Uganda Micro-finanance Limited (UMU) is a local Micro-Credit institution in Uganda that was established in 1997 to empower the poor by providing them with low interest loans. The institution primarily adopted this method of lending and has transformed itself from a two-man rural-based research pilot project to a 20 branch competitive and reputable Micro Deposit taking institution (MDI) with a clientele of over 84 billion and a total loan portfolio of 20.5 billion. 

 

Through its primary product, the working capital loan scheme, self selected groups with members ranging from 5-10 are formed with at least 50% female participation. Field officers are assigned to carry out sensitization on the rules and procedures of lending. The loans are first disbursed to 2 members selected by the group, whose demonstrable capacity to repay the loan in time largely determine when the others receive their own share of loans. Loan amounts range from Uganda Shs 50.000 and increments are recommended depending on the client’s performance and ability to repay. The borrowers pay a flat rate of 3-4% interest rate on a declining balance monthly and the loan terms range from 6-24 months.

 

Members elect officials, who are entrusted with record keeping of individual group members’ borrowing, repayment and saving transactions. They make mandatory savings of 20% of their loans which can be used to pay up in events when a group member defaults genuinely.

 

The advantage of solidarity group lending is that neither collateral security nor credit history is a prerequisite to qualify for borrowing. The group members also undertake careful screening of prospective group members and are usually careful to avoid risky, untrustworthy people. They also monitor the investment behaviour of one another during the servicing period, making sure members undertake safe financial investment projects with the borrowed capital.

 

This method of lending also boosts loan repayments since there are enforcement mechanisms in which group members have the mandate to sanction any defaulter. Provision of future loans are generally linked to good performance, therefore each member works towards paying faithfully to avoid being excluded from continued access to credit. The group members constantly hold group meetings in which  group pressure result to expulsion of “non performers’ from the group.

 

The flaws of this system come as a result of small incidences that quickly escalate into large scale defaults and borrowers adopt pessimistic expectations about the survival of the group. However, “borrowing groups are like juries, they help to repay loans for borrowers who cannot pay because of verified unavoidable mishaps and they expel those who have misused borrowed capital replacing them with trustworthy ones”.

 

 


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