Things to Know About Group Loans

Group loans, according to IGI-Global.com, are a lending mechanism that allows a group of individuals, often referred to as a solidarity group, to provide collateral or a loan guarantee through a group repayment pledge. Group loans are quite common in Africa, especially since many businesses are micro-enterprises. This product is typically offered by microfinance companies, where group members rely on each other for repayment, as there is no need for a traditional guarantor.

Group loan amounts are usually smaller compared to individual loans. This system allows entrepreneurs to access loans even without collateral or a guarantor. However, for group loans to be effective, business owners must consider the following factors:

Membership

Group loans are usually composed of 4-10 members, though larger groups of 10-25 members exist. Every group loan must have a leader, who is responsible for coordinating group affairs. For larger groups, meetings and micro-training sessions are often held at the group leader’s home.

The group leader typically acts as an intermediary between the microfinance institution and the group members. They are also responsible for collecting loan installments, although any member can make payments on behalf of the group. Sometimes, microfinance companies use the leader’s name as the group name. For example, in a group of five where the leader is Thelma Manu, the group name could become “THELMA MANU GROUP.” As a leader, it is your duty to ensure that members comply with the policies of the lending institution. There are situations where group leaders may need to pay on behalf of members if their installments are unavailable.

Relationship

As a micro-business owner, it’s essential to have a good relationship with the members of your group. A strong relationship among members is crucial for the smooth functioning of the group. It is also important for members to operate businesses within the same vicinity, as this allows for better monitoring by their relationship officers.

Microfinance institutions should not form groups for clients because it’s essential for members to be accountable to one another in case of default. Additionally, forming a group within a family is not advisable, as any personal issues within the family can affect the loan repayment.

Type of Business

Members of the group should have separate businesses and must have been operating for at least a year. For the group to function effectively, members should not be involved in the same type of business. It is important that they deal in different products or offer different services. This helps to minimize risk in case any issues arise in a particular sector.

For example, if all members are in the business of selling frozen foods, a prolonged power outage could significantly affect their incomes, which could, in turn, impact their ability to make loan payments.

Short Duration

It’s wise to keep group loans short in duration to monitor members effectively. Shorter loan durations help group members pay less interest and allow them to access new loans more frequently. This enables them to increase their stock and boost sales.

Collateral

Group loans provide micro-enterprise owners, particularly those without collateral, with the opportunity to access credit. Most small traders in developing countries lack traditional collateral, making group loans a vital option. These loans rely on mutual guarantees, where members are collectively responsible for each other’s loan repayments, much like a guarantor does in individual loans.

Conclusion

Group loans help low-income entrepreneurs access credit without the need for collateral, which has been a barrier for many in accessing formal banking services. It is essential for microfinance companies to provide equal loan amounts to each member, making it easier to pay back the loan in the event that one member is unable to pay their instalment.