Solidarity lending is a lending practice where small groups borrow collectively and group members encourage one another to repay. It is an important building block of microfinance.
Solidarity lending is a lending practice where small groups borrow collectively and group members encourage one another to repay. It is an important building block of microfinance.
Solidarity lending takes place through 'solidarity groups'. These groups are a distinctive banking distribution channel used primarily to deliver microcredit to poor people. Solidarity lending lowers the costs to a financial institution related to assessing, managing and collecting loans, and can eliminate the need for collateral. Since there is a fixed cost associated with each loan delivered, a bank that bundles individual loans together and permits a group to manage individual relationships can realize substantial savings in administrative and management costs.
In many developing countries the legal system offers little, if any support for the property rights of poor people. Laws related to secured transactions – a cornerstone of Western banking – may also be absent or unenforced. Instead, solidarity lending levers various types of social capital like peer pressure, mutual support and a healthy culture of repayment. These characteristics make solidarity lending more useful in rural villages than in urban centres where mobility is greater and social capital is weaker.
Efforts to replicate solidarity lending in developed countries have generally not succeeded. For example, the Calmeadow Foundation tested an analogous 'peer lending' model in three locations in Canada: rural Nova Scotia and urban Toronto and Vancouver during the 1990s. It concluded that a variety of factors – including difficulties in reaching the target market, the high risk profile of clients, their general distaste for the joint liability requirement, and high overhead costs – made solidarity lending unviable without subsidies. [1] However, debates have continued about whether the required subsidies may be justified as an alternative to other subsidies targeted to the entrepreneurial poor, and VanCity Credit Union, which took over Calmeadow's Vancouver operations, continues to use peer lending.
Tapping social capital to lend money is not new to microfinance. Earlier precedents include the informal practices of ROSCAs and the bonds of association used in credit unions. In India, the practice of self-help group banking is inspired by similar principles.
However, solidarity groups are distinctly different from earlier approaches in several important ways.
First, solidarity groups are very small, typically involving 5 individuals who are allowed to choose one another but cannot be related. Five is often cited as an ideal size because it is:
Much evidence has also shown that social pressure is more effective among women than among men. The vast majority of loans using this methodology are delivered to women.
Learning from the failure of the Comilla Model of cooperative credit piloted by Akhtar Hameed Khan in the 1950s and '60s, Grameen Bank and many other microcredit institutions have also taken an assertive approach to targeting poor women and excluding non-poor individuals entirely.
A major reason for the prior failure of credit cooperatives in Bangladesh was that the groups were too big and consisted of people with varied economic backgrounds. These large groups did not work because the more affluent members captured the organizations. [2]
An early pioneer of solidarity lending, Dr. Muhammad Yunus of Grameen Bank in Bangladesh describes the dynamics of lending through solidarity groups this way:
... Group membership not only creates support and protection but also smooths out the erratic behavior patterns of individual members, making each borrower more reliable in the process. Subtle and at times not-so-subtle peer pressure keeps each group member in line with the broader objectives of the credit program. … Because the group approves the loan request of each member, the group assumes moral responsibility for the loan. If any member of the group gets into trouble, the group usually comes forward to help. [3]
The Grameen approach uses solidarity groups as its primary building block. However, responsibility for delinquent loans is handled by the elected leaders of a larger, village-level group called a 'centre' composed of eight solidarity groups. Because all the members are from the same village and loan payments take place during the centre meeting, the principle of using social capital for leverage is not compromised; the only difference is that all the members of the centre are collectively responsible for unpaid loans. [4]
Many microcredit institutions use solidarity groups essentially as a form of joint liability. That is, they will take any action practical to collect a seriously delinquent loan not just from the individual member, but from any member of the solidarity group with the capability to repay it. But Yunus has always rejected this concept, arguing that whatever moral responsibility may pertain among group members, there is no formal or legal "... form of joint liability, i.e. group members are not responsible to pay on behalf of a defaulting member." [5]
Solidarity lending is widespread in microfinance today, particularly in Asia. In addition to Grameen Bank, major practitioners include SEWA, Bank Rakyat Indonesia, Accion International, FINCA, BRAC and SANASA. The Calmeadow Foundation was another important pioneer.
The Microbanking Bulletin tracks solidarity lending as a separate microfinance methodology. Of 446 microfinance institutions worldwide that it was tracking at the end of 2005, 39 lent only through this method, while another 205 used a mix of solidarity and individual lending. The average loan balance outstanding at solidarity lenders was $109 (19% of local gross national income), compared to $1,024 (61% of local gross national income) among individual lenders. This shows not only that solidarity lenders are meeting the needs of a significantly poorer market segment, but also that they are doing it in significantly poorer countries. [6]
In Costa Rica, many companies enable their employees to organize Asociaciones Solidaristas (Solidarism Associations), which enables them to create saving funds, loans, and financial activities (for example managing the company's coffee shop) with financial support from the company. [7]
Solidarity lending has clearly had a positive impact on many borrowers. Without it, many would not have borrowed at all, or would have been forced to rely on loan sharks. However, it has been the subject of much criticism. A recent survey of the empirical research concludes that the search for alternative approaches must continue, and highlights problems such as "borrowers growing frustrated at the cost of attending regular meetings, loan officers refusing to sanction good borrowers who happen to be in 'bad' groups, and constraints imposed by the diverging ambitions of group members." [8]
Efforts to ensure that all members of solidarity groups are equally poor may not always improve group performance. Greater socio-economic diversity "means that group members' incomes are less likely to vary together, and thus group members' ability to insure each other increases". [9] The solidarity lending approach, which excludes less-poor borrowers, was adopted in large part because of a view that the more inclusive cooperative 'bond of association' had failed in Bangladesh (see the Comilla Model). But the founder of Bangladesh's credit cooperatives, Akhter Hameed Khan documented that the Model's practices contravened two fundamental credit union operating principles: independence from government intervention, and local financial self-reliance. [10] The case that the 'inclusive' approach to organizational development used by the Comilla Model accounts for its failure has not been made.
While poverty-targeting has had many successes, social solidarity is not solely a tool for the lending institution – it can also be used by borrowers. A loan 'strike', if it gains the sympathy of a large number of borrowers, can lead to a rapid and highly unstabilizing escalation in delinquencies. It was this type of circumstance that led in 1998, to the rapid escalation of delinquency at Grameen Bank that resulted in the redesign dubbed 'Grameen II'. [11]
The photo above – of a group of women seated in rows on the ground before a male NGO-officer who sits in a chair processing their payments – encapsulates another common critique. Solidarity groups may be composed entirely of women, but the staff who decide when and if they receive financial services are often dominated by males.
Microcredit is the extension of very small loans (microloans) to impoverished borrowers who typically lack collateral, steady employment, or a verifiable credit history. It is designed to support entrepreneurship and alleviate poverty. Many recipients are illiterate, and therefore unable to complete paperwork required to get conventional loans. As of 2009 an estimated 74 million people held microloans that totaled US$38 billion. Grameen Bank reports that repayment success rates are between 95 and 98 percent.
Microfinance is a category of financial services targeting individuals and small businesses who lack access to conventional banking and related services. Microfinance includes microcredit, the provision of small loans to poor clients; savings and checking accounts; microinsurance; and payment systems, among other services. Microfinance services are designed to reach excluded customers, usually poorer population segments, possibly socially marginalized, or geographically more isolated, and to help them become self-sufficient. ID Ghana is an example of a microfinance institution.
Grameen Bank is a microfinance organisation and community development bank founded in Bangladesh. It makes small loans to the impoverished without requiring collateral.
Muhammad Yunus is a Bangladeshi social entrepreneur, banker, economist and civil society leader who was awarded the Nobel Peace Prize for founding the Grameen Bank and pioneering the concepts of microcredit and microfinance. These loans are given to entrepreneurs too poor to qualify for traditional bank loans. Yunus and the Grameen Bank were jointly awarded the Nobel Peace Prize "for their efforts through microcredit to create economic and social development from below". The Norwegian Nobel Committee said that "lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty" and that "across cultures and civilizations, Yunus and Grameen Bank have shown that even the poorest of the poor can work to bring about their own development". Yunus has received several other national and international honours. He received the United States Presidential Medal of Freedom in 2009 and the Congressional Gold Medal in 2010.
Opportunity International is a 501(c)(3) nonprofit organization chartered in the United States of America. Through a network of 47 program and support partners, Opportunity International provides small business loans, savings, insurance and training to more than 14 million people in the developing world. It has clients in more than 20 countries and works with fundraising partners in the United States, Australia, Canada, Germany, Switzerland, Singapore, Hong Kong and the United Kingdom. Opportunity International has 501(c)(3) status as a tax-exempt charitable organization in the United States of America under the US Internal Revenue Code.
Akhter Hameed Khan was a Pakistani development practitioner and social scientist. He promoted participatory rural development in Pakistan and other developing countries, and widely advocated community participation in development. His particular contribution was the establishment of a comprehensive project for rural development, the Comilla Model (1959). It earned him the Ramon Magsaysay Award from the Philippines and an honorary Doctorate of law from Michigan State University.
The Orangi Pilot Project collectively designates three Pakistani non-governmental organisations working together, having emerged from a socially innovative project carried out in 1980s in the squatter areas of Orangi, Karachi, Pakistan. It was initiated by Akhtar Hameed Khan, a North Indian muhajir from Uttar Pradesh, and implemented by Perween Rahman, a Bihari from Bangladesh and involved the local residents solving their own sanitation problems. Innovative methods were used to provide adequate low cost sanitation, health, housing and microfinance facilities.
Cooperative banking is retail and commercial banking organized on a cooperative basis. Cooperative banking institutions take deposits and lend money in most parts of the world.
The non-governmental organisation based in Bangladesh which provides microcredit financing.
Banker to the Poor: Micro-Lending and the Battle Against World Poverty is an autobiography of 2006 Nobel Peace Prize Winner and Grameen Bank founder Muhammad Yunus. The book describes Yunus' early life, moving into his college years, and into his years as a professor at Chittagong University. While a professor at Chittagong University, Yunus began to take notice of the extreme poverty of the villagers around him. In 1976, Yunus incorporated the help of Maimuna Begum to collect data of people in Jobra who were living in poverty. Most of these impoverished people would take a loan from moneylenders to buy some raw material, using that raw material to create some product, and then selling back the good to the moneylender to repay the loan, earning a very meager profit. One woman interviewed made no more than two cents per day creating bamboo stools using this system. The list Begum brought back to Yunus named 42 women who were living on credit of 856 taka.
The Comilla Model was a rural development programme launched in 1959 by the Pakistan Academy for Rural Development. The academy, which is located on the outskirts of Comilla town, was founded by Akhter Hameed Khan, the cooperative pioneer who was responsible for developing and launching the programme.
Village banking is a microcredit methodology whereby financial services are administered locally rather than centralized in a formal bank. Village banking has its roots in ancient cultures and was most recently adopted for use by micro-finance institutions (MFIs) as a way to control costs. Early MFI village banking methods were innovated by Grameen Bank and then later developed by groups such as FINCA International founder John Hatch. Among US-based non-profit agencies there are at least 31 microfinance institutions (MFIs) that have collectively created over 800 village banking programs in at least 90 countries. And in many of these countries there are host-country MFIs—sometimes dozens—that are village banking practitioners as well.
The Grameen family of organizations has grown beyond Grameen Bank into a multi-faceted group of both commercial and non-profit ventures. It was first established by Muhammad Yunus, the Nobel Peace Prize-winning founder of Grameen Bank. Most of the organizations in the Grameen group have central offices at the Grameen Bank Complex in Mirpur, Dhaka, Bangladesh. The Grameen Bank started to diversify in the late 1980s when it began attending to unutilized or underutilized fishing ponds, as well as irrigation pumps like deep tubewells. In 1989, these diversified interests started growing into separate organizations, as the fisheries project became Grameen Fisheries Foundation and the irrigation project became Grameen Krishi Foundation.
Bharat Financial Inclusion Limited or BFIL is a banking & finance company (NBFC), licensed by the Reserve Bank of India. It was founded in 1997 by Vikram Akula, who serve as its executive chair until working. The company's mission is to provide financial services to the poor under the premise that providing financial service to poor borrowers helps to alleviate poverty. In 2011, the company operated across 11 Indian state.
Bangladesh is a developing country with an impoverished banking system, particularly in terms of the services and customer care provided by the government run banks. In recent times, private banks are trying to imitate the banking structure of the more developed countries, but this attempt is often foiled by inexpert or politically motivated government policies executed by the central bank of Bangladesh, Bangladesh Bank. The outcome is a banking system fostering corruption and illegal monetary activities/laundering etc. by the politically powerful and criminals, while at the same time making the attainment of services or the performance of international transactions difficult for the ordinary citizens, students studying abroad or through distance learning, general customers etc.
Grameen America is a 501(c)(3) nonprofit microfinance organization based in New York City. It was founded by Nobel Peace Prize recipient Muhammad Yunus in 2008. Grameen America is run by former Avon Chairman and CEO Andrea Jung. The organization provides loans, savings programs, financial education, and credit establishment to women who live in poverty in the United States. All loans must be used to build small businesses.
Microcredit for water supply and sanitation is the application of microcredit to provide loans to small enterprises and households in order to increase access to an improved water source and sanitation in developing countries. While most investments in water supply and sanitation infrastructure are financed by the public sector, investment levels have been insufficient to achieve universal access. Commercial credit to public utilities was limited by low tariffs and insufficient cost-recovery. Microcredits are a complementary or alternative approach to allow the poor to gain access to water supply and sanitation.
To Catch a Dollar: Muhammad Yunus Banks on America is a 2010 documentary film directed and produced by Gayle Ferraro about the 2006 Nobel Peace Prize winner's ongoing campaign against poverty around the world. It touches on the beginnings of the original Grameen Bank in the 1970s, then focuses primarily on the beginnings of Grameen America's work in the US, especially the launch of its first programs in Queens, New York in 2008. The title of the film comes from a clip of Muhammed Yunus speaking in the film: "In a world where you need a dollar to catch a dollar, you need to have something to help the bottom people to lift themselves up."
The impact of microcredit is a subject of much controversy. Proponents state that it reduces poverty through higher employment and higher incomes. This is expected to lead to improved nutrition and improved education of the borrowers' children. Some argue that microcredit empowers women. In the US and Canada, it is argued that microcredit helps recipients to graduate from welfare programs. Critics say that microcredit has not increased incomes, but has driven poor households into a debt trap, in some cases even leading to suicide. They add that the money from loans is often used for durable consumer goods or consumption instead of being used for productive investments, that it fails to empower women, and that it has not improved health or education.
Kashf Foundation is a non-profit organization, founded by Roshaneh Zafar in 1996. Kashf is regarded as the first microfinance institution (MFI) of Pakistan that uses village banking methodology in microcredit to alleviate poverty by providing affordable financial and non-financial services to low income households - particularly for women, to build their capacity and enhance their economic role. With headquarters in Lahore, Punjab, Kashf has regional offices in five major cities and over 200 branches across the Pakistan.