Group lending is often the first step to access finance. Group lending consists of five to twenty persons coming together with the objective of obtaining a loan from their peers or from a Microfinance Institution (MFI). To be eligible for a loan from the MFI, a group needs to apply the principle of “savings first”. The group needs to build a savings reserve for several months to prove its creditworthiness before being granted a loan from the MFI. In the meantime, the group can work in an informal way by lending the saved money to its members. Peer pressure is the only security that guarantees repayment of the loan in this configuration.
Group lending has proven to be an enabling tool for the most disadvantaged populations, in particular women. Let’s start with the example of a group of 10 women in Africa who produce argan oil. Individually, these women are not eligible for a loan because they have no collateral, but as a team, they can apply for a group loan to an MFI. The guarantee of one’s loan by the other group members replaces the loan collateral and is one of the advantages of group lending. This is commonly known as the joint liability principle that imposes the repayment of a loan to the entire group. Joint liability might also be considered a drawback of group lending in the case when one person defaults on a loan and the entire group is considered bankrupt. In the best-case scenario, all members manage to repay their loans and will be able to obtain higher loans in the next loan cycle to grow their business. This concept is the loan graduation and gives the lending MFI additional security that the group is solvent.
Another advantage of group lending is its capacity to improve women’s well-being and empower them in their professional life. A study conducted at XacBank in Mongolia by Orazio Attanasio et al. showed that group lending was more efficient than individual lending for female entrepreneurship. One of the reasons that could explain the success of group lending is that less educated women are more comfortable borrowing as part of a group than borrowing alone. Indeed, the 1.5-year experiment showed that in the end, less-educated women had a 29% higher chance of operating a business compared to similar women in control villages.
Besides the certain profit and success that comes with the possibility to develop a new business for women, the group loan can have a positive impact on the way women perceive themselves, as shown by a study by Heleen de Goey conducted in Tanzania. Women gained entrepreneurial skills even if not all of them were able to make a profit. All groups reported some positive social changes. One of the most interesting findings is that women received more respect from the community and their husbands, which changed their gender relations. Participants gained self-confidence as they were able to contribute to the household income, which in Tanzania is usually a men’s duty.
The social and financial advantages and disadvantages of group lending may offset each other, however, for many microfinance clients group lending is too expensive and the risks such as “free riding” of group members may discourage them from entering the scheme. Once an individual has gained sufficient financial independence, contributing to a lending group might be burdensome and the individual may want to leave the group to take an individual loan.
Certified Expert in Microfinance, Script Unit 2 – Microfinance – Managing micro-credit
 Attanasio, O, B Augsburg, R De Haas, E Fitzsimons, and H Harmgart (2011), “Group lending or individual lending? Evidence from a randomised field experiment in Mongolia”, EBRD Working Paper No. 136. https://cepr.org/voxeu/columns/microfinance-it-time-write-group-loans
 De Goey, H. (2012). The Social Impact of Microfinance: What Changes in Well-Being are Perceived by Women Group Borrowers after Obtaining a Group Loan? Uppsala University, Department of Earth Sciences Master Thesis E, in Sustainable Development.
This article was written by Anna Letta, Sustainability Operations Officer @ LuxFLAG as part of her scholarship to attend the Certificed Expert in Microfinance programme of the Frankfurt School.
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