How Saccos maintain a delicate balance in the group lending model

SACCO Saccos

The group lending model has increasingly become popular among Saccos and Micro-Finance Institutions (MFIs) in recent years.

This is largely based on its ability to leverage on joint liability and increased loan repayments while promoting entrepreneurial spirit among borrowers.

Group lending methodology is a unique financial service for low income entrepreneurs. To obtain such a loan, it is necessary to form a group of three or more individuals who run businesses that earn income and have been active for at least three months.

Group members guarantee each other’s loan repayment, which is why collateral is not necessary.

The group lending model of micro-credit is a development intervention in which small scale credit for income-generation activities is provided by Saccos or MFIs to groups of individuals who do not have material collateral.

Group lending has become a popular practice in many developing countries across the world, where it has become a proven tool of addressing poverty-related economic challenges among the most disadvantaged rural and urban poor populations, in particular women.

In this arrangement, instead of one attempting to borrow individually, people organize themselves into self-help or social enterprise groups that take loans. All group members are responsible for paying them back.

Under this concept, the guarantee of one’s loan by the other group members replaces the loan collateral, which more often becomes one of the advantages of the model.

This arrangement is commonly known as the joint liability principle that imposes the repayment of a loan to the entire group.

Group lending is often thought to be the first step to accessing micro-credit from Saccos and MFIs. To be eligible for a loan from the Sacco or MFI, a group needs to apply the principle of ‘saving first’, meaning it needs to build a savings reserve for several months to prove its creditworthiness before being granted a loan.

Yet it should be noted that peer pressure is the only security that guarantees repayment of the loan in this configuration.

The essence of group lending is ‘lending without collateral’, but a guarantee of solidarity among group members, hence it is widespread in the line of credit products of microfinance institutions.

Nevertheless, it is equally important for groups to provide additional or alternative forms of security as a repayment of loans as a joint liability. This approach works because the group reputation is at stake and future access to credit for members depends on individuals paying off their loans.

However, under this arrangement, social pressure is brought to bear on individual borrowers by members of the group ensuring they repay their loans.

By Ben Oroko

The writer is a communications practitioner and correspondent based in Kisii.

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