Group-based lending has proved to be successful in terms of quality loan portfolio, client’s growth and profits.
Besides, group-base lending addresses collateral security challenges faced by MSMEs and helps minimize the risk of liquidity stress of rural banks.
Despite the merits, group-based lending with inappropriate methodologies, weak group management, multiple borrowing, over-indebtedness, have resulted in most cases in high loan default rates.
It is therefore in this regard that the Association of Rural Banks (ARB) with support from GIZ has contracted the services of Microfin Consult to build the capacity of directors and management of rural banks in effective group lending practices to improve financial services delivery to MSMEs.
The training programme which is expected to end this month commenced in July 2021 in Accra. The training has taken place in Koforidua, Kumasi, Sunyani, Takoradi, and Tamale and will finally end in Winneba by September 17, 2021.
Addressing participants at one of the sessions in Koforidua, the Executive Director of Association of Rural Banks, Mrs Comfort Owusu said the primary of objective of the training programme is to build capacity of rural banks for effective Group-Based Lending and specifically to highlight lending policy, monitoring mechanism, growth strategies and best recovery strategies in case of default.
She added that the training seeks to help RCBs to develop and design manual of effective group based lending and to sensitize board of directors of the rural banks on the successes of effective group lending and various funding options on the market for group-based lending.
Group lending is a mechanism that allows individuals to obtain MSME loans from financial institutions through well-facilitated groups.
Consequently, the threats to financial system stability cannot be overemphasized as most of the rural banks do not have the right loan product to diversify their investments. Good group lending will allow rural banks to scale up lending to MSMEs and as such updated and best practices in group lending will enable rural banks to respond to the contemporary challenges in the microfinance sector.
Microfinance encompasses the provision of sustainable financial services to households and micro-enterprises that are usually excluded from traditional commercial banking system. The services that microfinance provides include microcredit, micro savings, and micro-leasing, micro-insurance as well as micro-funds transfer.
There are two main lending approaches in microcredit which are individual lending and group lending. Individual lending is the provision of credit to one client and not requesting other members to serve as guarantors but rather base loan eligibility on a client’s character assessment and cash flow analysis etc.
Individual lending is not dependent on any membership of an individual to a group. The microfinance institutions offer loans directly to individual clients depending on individual needs and risk profiles.
Group lending on the other hand is a way in which individuals with low-income level who cannot afford collateral for loan individually form a group so that they can co-guarantee for each other.
The group may be composed of five (5) up to a number that is determined by the microfinance institution. Usually, majority of groups in various MFIs range between 5 and 36 members.
Each group must have a leader or chairperson, a secretary and a treasurer. The composition of the groups sometimes may be comprised of individuals who are into the same economic activity (homogeneous) or different economic activities (heterogeneous). The amount borrowed by each member in the group is dependent on the group bylaws and the policy of the MFI.
Difference between Individual and Group Lending
Group lending and individual lending methodologies and processes offer different approaches in providing micro-credit. It is important for the rural banks to note the distinction and implication in developing business models for the group lending and individual lending.
One fundamental and key difference in the two approaches is that, for the group lending, loan screening, monitoring and enforcement of loan repayment is largely managed by the group members themselves, whilst for the individual lending, this responsibility shifts to the lending institution.