A. Overview of Group Methodology

1. Success of Group Lending
2. Group Lending Guidelines
3. Loan Approval
4. Forming Credit Groups

This chapter, after a brief overview of the group credit methodology, is intended to help you start your programme with specific advice on how to introduce a mincrofinance programme into a community.

1. Success of Group Lending

0ver the past twenty years, microfinance institutions worldwide have perfected group lending techniques.

Their lessons have contributed to the increasing reservoir of expertise in the field. This section represents some of the most successful practices of microfinance programmes and banks in Asia, Africa and Latin America.

Group lending has been successful for several reasons:

• The self-selecting methodology is an effective means of character screening and verification
• a fundamental part of credit analysis and risk in any type of financing program;

• Before a group agrees to guarantee a loan, they discuss the business idea with the individual member applying for the loan. This discussion tests the soundness of the idea and serves as a substitute for a costly feasibility study;

• Groups serve as an outstanding method of 'guaranteeing' a loan when no collateral is available. Because a group's credit is 'frozen' until all members are current, groups exert pressure on their members to repay loans on time;

• Many cultures have a tradition of lending money to members of savers' groups. Thus, principles of group lending are often familiar to target clients;

• Groups perform many of the administrative duties in managing loans. This reduces an institution's cost of delivering credit;

• Group members tend to become interested and involved in each other's businesses over time and offer much guidance and support to fellow members.

We have focused on individual groups for this guide. However, it is strongly recommended that meetings be held with 5-10 groups at a time.

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2. Group Lending Guidelines

Leading practitioners in more than 50 developing countries continue to refine group lending practices. Their collective wisdom, noted below, has proved effective in most cultures.

The most effective groups have 5 to 15 members.

However, in some rural areas, villagers who know each other well can create groups as large as 50.

Only one member per household may be in the same group.

Also, group members must be from the same community.

Groups elect their own officers.

Officers usually consist of at least a Group Leader and a Group Treasurer Some groups have other positions as well. Groups may choose to rotate officers over time.

Groups often create their own bylaws.

Before becoming certified and thus eligible to borrow, the group develops bylaws or rules for conducting group business. Bylaws determine policies for:

• who can join the group and the minimum/maximum size of the group
• collecting loan payments
• electing group officers (length of term, removal, etc.)
• removing members from a group
• holding meetings
• a buffer fund and late payments

The duties of the Group Leader:

• organize and run group meetings;
• ensure group bylaws are updated to reflect changes;
• submit completed loan applications to Field Agents;
• alert group members of delinquent loan payments;
• ensure the group resolves problems in a timely fashion;
• serve as the contact person between the group and Field Agents.

The duties of the Group Treasurer:

• collect and record loan payments;
• collect and record deposits to savings.

No member of a group may receive a new loan unless all members of the group are up to date on loan payments.

If members have made late payments during a loan cycle, the applicant may still receive a loan as long as all members have repaid their loans at the end of the loan cycle and the group approves the loan.

Group members sign off on each loan application.

The group agrees to 'guarantee' the loan. A guarantee in this case means that members agree not to apply for additional loans unless the applicant is up to date with payments. In the event the member is late or is in default, the group agrees to repay the loan on behalf of the client in order to be eligible for more loans.

Groups typically create a 'group buffer fund.'

Often called the "Group Savings Fund" and held by the project, this amount serves as a substitute for collateral and belongs to all members as long as they have paid back loan obligations in full. Often members contribute 5 to 10 per cent of the amount of each loan to a fund at the beginning of each loan cycle. Access to these funds should be permitted in the third year or later.

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3. Loan Approval

Institutions differ widely on who makes credit decisions. We recommend that groups decide who may borrow. We leave it to you to decide the loan approval policy you wish to adopt.

A project Field Agent helps the group construct bylaws to assist the group in making sound loan approval decisions. The philosophy? No one knows community members better-- their businesses, their behaviour, their characters-- than other community members. Since micro-loans are generally character loans, those in the best position to assess character decide who receives a loan. Moreover, if the responsibility of the loan decision rests fully with the group with no additional review by staff, the group feels empowered and will be more likely to correct delinquencies.

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4. Forming Credit Groups

The group formation and certification process may require a few visits to a particular community. Each step may involve more than one meeting. In general, Field Agents should allow a few weeks to form a group and may facilitate the formation of several groups within a community simultaneously, thus using time in that community efficiently. Whether forming one group or several, the process is the same:

Promotional Visit to a Community

A Field Agent visits community leaders to enlist support and distribute flyers.

Information Meeting

A Field Agent holds an "information" meeting" in a public place to describe the programme.

Group Development Meeting(s)

A Field Agent facilitates the formation of and screens prospective groups of 5 to 15 clients.

Application Meeting

Group members complete individual loan applications. The Field Agent helps members review their first loans. The group makes loan approvals.

Site Visits

The Field Agent visits each household to verify information on the application. The Field Agent, if satisfied, signs off on the loan applications.

Group Certification

The Manager visits the community and determines if each group is ready to borrow by conducting interviews with groups to ascertain their knowledge of credit rules and procedures, as well as their own economic activities. If the Loan Manager is satisfied, the group receives a Credit Group Certification Form, a procedure done only once per group.

Staff Reviews

Field Agents and the Loan Manager meet periodically to present group applications. The purpose of the meeting 'IS to ensure paperwork is in order.

Loan Processing

The Loan Manager gives paperwork to the accounting staff for loan processing.

Loan Disbursement/Repayment

Depending on arrangements with local banks, disbursements and payments are best done in full view of the groups with appropriate documentation as recommended in Chapter 3: Managing.

Loan Approval for Subsequent Loans.

Once the first loan cycle is complete, the Field Agent works with the groups to assist with Loan Applications and site visits for the next loan cycle. The Field Agent does not need to certify the group for each loan cycle.