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Contributions from
the Column
Focus
“In the long run,
clients will prefer
individual loans”
Microcredit world record
Social control and group solidarity
“Prime example of pro-poor growth”
Mitigating risks in Uganda
Never too little
01/2006
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Social control and group solidarity
“And then we adopted a child,” the interpreter says, translating the words of the older woman sitting with the self-help group in the only room of a village school in Bangalore Rural District. “A group member adopted a child?,” I ask. “No, not one of the group – the group itself adopted a child,” is the reply. I am impressed by the civic commitment of these poor people in the State of Karnataka. They have also painted the school building and made a donation for earthquake victims in 2001.
The social side-effects of many microfinance programmes are now widely known. They essentially result from the empowerment of group members – especially of women. Success breeds confidence, helping people act more assertively as a group and also as individuals. They negotiate with banks, take charge of family finances, and even get the district authority to close down local liquor shops because men squander too much money there. Some women even save for their own dowry and thus get a say in the choice of their husband.
The self-help groups start out without bank loans, collecting small but regular sums of money saved by members. The average amount is 40 rupees (roughly ¤0,80) per member and month. In many cases, groups are established by NGOs or even government agencies. Only around a quarter are formed at the direct or indirect instigation of a bank. At the outset, the groups need support – not least because of widespread illiteracy. But once a group has gained some ground financially, it is likely to even need an accountant to keep track of its capital.
The money saved is lent to members on terms the group determines itself. Between two and three percent interest a month is payable and used to augment the group’s asset base. In this phase, groups learn the fundamental rules of lending and recovering money. At the same time, the members learn to handle, invest and repay borrowed funds.
The bank that will later partner the initiative observes the group from an early stage. If after six to 18 months it is convinced that the group is sound, it tops up the group’s capital fund with a loan. To this end, the group formally opens an account with the bank, its members accepting joint liability for all debt.
The banks normally set interest at between eight and 15 percent a year. In the world of microfinance banking, that level is very low. It is due partly to India’s long tradition of “social banking” but also to the near-100% repayment rates achieved, which make cross-financing unnecessary as a hedge against default. The fresh money from the bank is lent to members at the interest rates normally charged by the group. The group’s potential is thus strengthened and individuals can take up bigger loans.
Social control and group solidarity take the place of the collateral banks normally require. The groups chose their membership according to personal trustworthiness. Accordingly, personal acquaintanceship renders checking credit – a cost-generating activity – unnecessary. In the eyes of those lending the money (banks, NGOs or government bodies), this practice means more credit volume and low transaction costs.
Of course, not all groups are equally successful. For the German researcher, some of them seemed rather artificial entities formed for the personal benefit of the two chairpersons. Sometimes ambition would also seem directed at getting access to governmental support. Most of the self-help groups we studied, however, were obviously working well and enjoying the respect of their entire villages because of their achievements.
Stefan Karduck
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