Group Lending


One aspect of microfinance that is as equally as important to the borrowers as it is the lenders is the Group Lending method that the Grameen Bank uses. Group, or solidarity lending, as defined by Wikipedia (everyone’s favorite website) is a lending practice where small groups borrow collectively and group members encourage one another to repay. It is an important building block of microfinance. 

Why is it so important? Well, for the clients it provides them with tangible and intangible support. Most of these entrepreneurs have nothing to prove their credit. So, think of Group Lending as social collateral. In these communities, you know your neighbor, you know their commitment to the community, their personal discipline and how they work. Since the women pick their own groups, this is a demonstration of their credit worthiness, as not many people would join a group that would hinder or hold back their performance. The intangible support may be just as important. These women are in the same situation and it’s good to know that someone has your back, or will help you up if you fall down. There is also a lot of value in being able to share their knowledge with each other and the networking aspect that comes with working with others (As a side note, I highly recommend The Wisdom of Crowds if you haven’t read it). In addition, these women can help each of their business thrive by purchasing each other’s goods.

For the Microfinance Institutions (MFIs), the Group Lending model helps make them more efficient, and actually, make their job possible. One loan officer might manage about 10 centers (5 in a group; 6-8 groups in a center). When you’re managing 450 borrowers, the group method really does help save some time. Think also, economies of scale; not only does this help the MFIs be more efficient, but it allows them to reach more clients, lowering their cost per “unit,” to speak in business terms.

In the past I’ve written about the different offerings that some of our MFI partners make available beyond microfinance. While Group Lending is a fundamental idea in microfinance, I think it’s when all these small pieces come together that we can most efficiently and effectively serve the poor.

Have you worked in groups before? How do you think it helps or hurts you? Let me know in the comments below.