Social Performance Management Network

Group lending is feasible only when the group is engaged in any economic activity- farming and or business - together on cluster basis. Mere peer persuasion does not work always.

Peer pressure has been the main objective o group lending but experience has revealed it does not work unless mutual economic interest and dependence is created. It would therefore be imperative to get the group involved in a common project of farming or manufacturing.

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Why should we need peer presure? If we provide the right loan product to the client and analyze it prudently, we do not need any pressure from other. The only "presure" we need is from the debtor who are thankful for our loan support to meet their financial objective.

I think it does not work in practical life as right loan product varies with individuals and with time, only when relates to their economic activities that generates income and help them to lead a healthy and happy life the right loan product could be visualized correctly and the same remains stable and assessed risk involvement when they work in groups. Individual farmers and artisans are helpless and hapless lot and therefore group involvement is imperative.

Dr.S.N.Ghosal

 

I do agree with your point. However, on the other hand, as group guarantee is a substitute collateral, it works for those very poor who have no any physical collateral for loans. The one economic interest, sometimes may create more problems due to the members' leadership, the economic power can be concentrated  and some members can not benefit from the joint economic project and unequal benefit among the group members. Also in case of business failure, the risk for delinquency is much higher than diversified business investment by the group members. 

best,

 

Nergui  S

 

 

Yr point is well taken and the safeguard could be if a cluster is created of people who pursue same business or farming.

Dr.S.N.Ghosal

Having the whole group involved in a single economic activity (or the same economic activity) concentrates risk and essentially undermines the possibility of collecting on the guarantee.  If all members are in the same business, they will all face hard times at the same time, leaving no one with the wherewithall to help out with loan repayments.  The idea behind group guarantee is not just peer pressure (although that is certainly part of it), it's also support and solidarity.  It recognizes that poor people are vulnerable to all sorts of shocks. It is based on the idea that everyone runs into trouble sometimes and that fellow group members can be counted on to "help out" the person who is in difficulties--and that this burden will be less if it is shared among many women instead of falling to a single guarantor.  Having all the members in the same or similar business increases the risk that no one will be able to "help out" and the whole group will fail.

 

Of course, I'd be the first to admit that group-lending methodogies are not always practiced this way, which is why this discussion is so important.

My understanding of shared economic interests does not necessarily go as far as having to engage in the same economic activity and same business. Indeed, insisting on this would undermine entrepreneurship.

I think what is important is that a group sees economic value (over and above the rightly highlighted social value - support and solidarity) in establishing and developing the cluster. Could very well be that they run one business, the same type of businesses, are within the same value chain, or simply be connected through shared economic facilities (e.g shared warehouse, hiring same transport, running a ROSCA, etc). The extent to which economic interests are shared between individuals should be a matter of entrepreneurship (the assessment of economic opportunities and the type of vehicles identified to exploit them) and should differ even within the same group. So different relationships should be established within the group.

I also mention the need for mechanisms for graduation and or re-clustering. Keeping in mind that individuals should not stay together for its own sake, mechanisms should exist to allow for structural changes that take account of emerging dynamics as socio-economic changes take place in the group. The lending mechanism must take account of the possibility for such.

Thanks for bringing up the issue of graduation or evolution of the lending relationships.  This is very important as groups have been historically inflexible.  But, the question is, what kind of options work? Not all ways that institutions try to restructure groups or that groups try to restructure themselves are healthy.  Some groups fail because they fail to change with their members. Others fail because the changes people made undermine the basic principles of self-selection and trust.

 

I still believe that lending to a group whose members are all in the same business or line of activity is inherently risky.  It's not impossible to do. However, because of the high risk that everyone will fail or succeed together, it amounts to one large loan and should be evaluated as such.

 

I agree that any group pursuing similar economic activity would face calamity together but u forgot that when the same is shared by a group of people it would not be a killer as group would be having more mental and money power to withstand the same as  compared to an individual entrepreneur borrower. One has to bear in mind that risk is enmeshed in all enterprise and that could be resolved only with the help of money and mind and obviously more the merrier.

Dr.S.N.Ghosal

The issues of shared economic interest and dependency are absolutely critical and have a bearing on the issues to be discussed in the week of 10th Oct 2011.

Other related matters include:

1. Levels of entrepreneurship

2. The match between financing and intended economic activities

3. Mechanisms for graduation and/or re-clustering according to current and intended economic activities

It is no doubt all the related matters are  imperative to bear in mind to form a successful cluster group and the flexibility to adjust with economic environment and innovation would provide to more strength and stability to the group.

Dr.S.N.Ghosal

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