Posted by: Katherine Oglietti
The solidarity group and village bank loan methodologies are common solutions that microfinance institutions utilize in order to reach clients who do not have the capacity to take out an individual loan. They arguably create social cohesion and build a community support network among the borrowers.
The data from MIX Social Performance Reports shows that the majority of group loans are consistently allocated to women. As we noted in a previous post, 110 of the MFIs surveyed report having women in their target market. Women make up 65% of all clients in those MFIs. When we divide loan methodology according to gender within those MFIs that target women, we observe that 74% of clients served by group-lending are women, while 53% of clients served by individual loan methodologies are women.
Why do MFIs prefer group lending for women? Here are some common explanations.
1) Alternative for poor clients: Globally, women have lower incomes than men, and therefore are not determined creditworthy for larger, individual loans.
2) Social Collateral: Women may not have the collateral necessary for an individual loan, and the group loan creates social pressure to ensure repayment.
3) Empowerment: Women may benefit from the social cohesion created through group meetings. Solidarity groups are therefore generally considered to contribute to women’s empowerment.
4) Safety nets: Women have a lower propensity to take risks, and taking an individual loan involves greater risk due to the absence of group support. Also, individual loans are usually larger, which involves greater risk of not being able to repay if the investment is not profitable.
However, if group loans may help an MFI manage risk and provide services more efficiently, the relation between group loans and women’s empowerment is something more difficult to grasp. The most effective way to target a market segment (in this case women) and achieve the development goals of an institution (in this case women’s empowerment) is to design products that attract the desired market and that match the customer’s needs. Therefore the question is: what role does the group lending methodology playing in meeting women clients’ needs?
It can be argued that group loans contribute to women’s empowerment by the social cohesion and support networks created during weekly meetings, especially when groups are comprised of all women. The meetings offer an opportunity to leave the exclusion of their households and participate in a group activity that earns them respect within the community. They learn creative problem solving and leadership skills in a safe environment. However, can it be assumed that, across regions, women do not have other social networks or are unable to form social networks on their own? Could women’s time during the weekly meetings be better spent in other activities that could as feasibly contribute to their empowerment? Further, could larger, individual loans better contribute to women’s empowerment through teaching them to resolve business problems on their own?
Perhaps it is the case that MFIs have found that women cannot handle larger, individual loans, either due to the greater stress of the increased risk, higher levels of poverty, or lack of collateral. However, women have been shown to be more creditworthy, with higher on-time loan repayment rates. This is one of the justifications for gender mainstreaming among MFIs. If this is the case, why are more repayment safeguards, through the group loan methodology, necessary for women?
This leads to the idea of graduation. Do MFIs create the possibility for women who begin with a group lending methodology to move to an individual loan methodology, after they establish themselves as dependable borrowers? Do clients have adequate information about all the available loan products in order to make an informed decision, or are loan officers making assumptions as to which loan products are appropriate for their clients?
There are many questions posed by the distribution of loan methodology according to gender. We would like to open all these questions for discussion, summarized by the final question: Are MFIs inadvertently limiting their female clients by encouraging the group lending methodology?
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