So far in the Microfinance 101 series, we have seen:
- What is Microfinance all about
- Who is Muhammad Yunus and what is Grameen Bank
In this part, we will learn about Group-based credit: SHGs and JLGs.
Group-based credit or solidarity lending is a common practice in microfinance. Rather than lending to individuals, MFIs usually lend to small groups of people who come together to borrow money and ensure timely repayment of the loan. This group-based approach has many advantages - more people tend to come forward and take a loan when they are part of a group. Also, peer pressure ensures that every member of the group repays. From the lending institution's point of view, lending to groups usually proves more cost-effective, since the cost associated with each loan is reduced by lending to groups. Also, usually there is no need for collateral if the loan is made to groups.
Self-Help Group (SHG)
A Self-Help Group refers to a group of 10-20 people who come from similar socio-economic backgrounds for various development programs or to solve common problems. Such groups are recognized by the governments and banks and can open bank accounts in the name of the SHG. These groups tend to be autonomous and tend to involve themselves in various activities, including social causes. So if a group of fifteen women in a village would like to apply for a loan start a small enterprise selling bags and cushions, they would be considered an SHG. These SHGs, by way of enterprise, tend to create more employment opportunities and inspire others to get involved in small enterprises as well.
Joint Liability Group (JLG)
A Joint Liability Group is usually a group of five to ten who come together to borrow from an MFI. The members in a JLG are also from similar socioeconomic backgrounds and usually the same village. A JLG is different from SHGs in that the members share liability, or stand guarantee for each other. If any of the member's default, the other members need to pool in money to repay the MFI. This ensures a greater effort on part of the members to ensure that everyone repays, thus ensuring resulting in better accountability and security for the MFI involved.
Next week, we'll learn why a microloan is better than a donation, or charity.