Financing against group/communal guarantee is a unique credit delivery strategy engineered by Dr Muhammad Yunus, Founder of Grameen Bank, making institutional credit accessible even to the poorest of the poor and is now being replicated all over the globe and is considered an important ingredient of micro financing promoting not only socio-economic welfare of the downtrodden, but also ensuring sustainability of micro financing institution or the bank itself.
Micro Finance Banks (MFBs) no doubt resort to individual lending also wherever possible, but experience with MFBs in Pakistan or elsewhere has proved that whatever defaults occur in repayment of loans mostly relate to individual borrowers despite these being covered against personal guarantees or partial cover obtained against the borrowers or family members' savings placed with the same financial institution.
In fact under group guarantee mechanism it is the implied responsibility of the entire group/community for proper utilisation of loan and thereafter regular generation of funds by each individual micro business, thus ensuring timely repayment of loan.
In case of micro businesses and small farms utilization of individual based credit exposure gives rise to specific risk induced and high administrative cost, which the financial institutions strive to minimise through employment of group based credit exposure where group members provide cross guarantee for each other.
Further, the strategy underlying group/communal guarantee automatically injects the problem solving approach among all members of the community as one of the requirements of this mechanism is that at the initial stage of each group lending only 50% of the members are disbursed loans and after their businesses start generating funds and they pay the first two instalments, the remaining members of the group are provided credit.
Hence, during the waiting period, these members monitor and supervise the performance of businesses of those who have been granted loan. In case of need they come forward to help the group members for making their businesses financially viable.
Secondly, the condition that repeat loan to any of group member/members is allowed only when there is no default in the entire group makes it a mutual social responsibility of the group members to help each other to ensure sustainability of the businesses of the entire group.
Group guarantee approach, apart from ensuring sustainability of the micro financing programme and wellbeing of the borrower adds to social capital of the community of the poor, particularly of women, who in all societies remain downtrodden because of patriarchal approach in the management of house, which contributes to her isolation and limits her involvement in community life.
At the same time her natural urge for survival even in worst circumstances has important role to play in the overall development of the family. Women in Pakistan, particularly in villages and even in certain pockets of big cities, do not have their own identity. They are identified by using possessive term denoting their relationship with male members of the family - known as daughter/mother/wife of someone.
Group lending entailing regular meetings of members of the group/communities to discuss all problems relating to businesses, utilisation of loan and repayment of loan etc provides opportunity to each member to come up with their problems and each member whether male or female is addressed by her/his name, thus women in particular come to realise their social identity, hence develop confidence to take independent decisions both regarding family affairs and business they are handling.
Group guarantee mechanism is different from Self - Help group (SHG) lending or group lending in the sense that in case of SHG lending financial institutions disburse loan to group management, who then on lends to individual members. This is a bigger group and repayment of loan is the overall responsibility of the group leader.
Banks, however, reserve the right to access individual borrowers to check performance of their micro businesses. In case of group guarantee size of group does not exceed six normally and the loan is disbursed directly to each member of the group in their turn.
No doubt in case of group guarantee all the members have their individual status as a borrower as well as depositor of the bank, but all members are individually and mutually responsible for repayment of each group loan. Thus problem solving, solidarity and social cohesion are automatically injected among the entire community.
Group members interaction with each other and members of other groups in the community not only facilitates spread of experienced based knowledge regarding operations of various lines of businesses, particularly in the areas of marketing, transport and storage facilities, but also of social issues particularly relating to education, health care and marriages of children of group members.
Hence financial institutions also get ample opportunity for widening the scope of lending. They can float products for financing higher education and health care needs of their client's families.
In this regard health insurance scheme on the pattern of group insurance can be arranged through insurance companies for the benefit of borrowers on payment of subsidised premium. Two of the five micro finance banks in the private sector in the country have already floated health insurance schemes, which apart from benefiting clients have provided extra cover to banks against clients' borrowings.
Group forming has created cohesion among communities by eliminating caste, religion and language differences. Problem solving understanding automatically embedded in the system helps in solving marketing and all processes related to it like transportation and distribution of products of all micro businesses run by group members.
Solidarity built among group/community members particularly of less developed areas, can prompt them to acquire various utility services, if not available in their area as positive response comes when demand comes from community as a whole and not from individuals.
Further, group approach promoting knowledge through interaction can facilitate use of new technologies, particularly relating to farming and allied businesses. Use of tractors, harvesting machine and other needed equipments can be possible by acquiring the same on joint ownership basis or hiring collectively by the group members.
Savings placed with the bank even by some of the group members in various saving products improve credibility of the entire group and at the same time provide additional cover against total borrowing of the group. Mechanism of group or communal guarantee can be applied for financing SME sector also, which continues to remain a neglected sector.
In this case instead of forming small groups bigger solidarity groups or associations can be formed of 10 to 20 small scalebusiness owners who find it difficult to borrow individually from financial institutions for their fixed and working capital needs.
These mutual guarantee associations need to be based on mutual capital contribution, developing into a group guarantee fund, and issue of shares to each member in lieu of their contribution, which must be transferable or saleable after a period not less than one year. Members of these associations get loans from banks backed by group guarantee fund.
Some of the countries focusing on their SME sector have followed the strategy of placement of their small and medium size industries in clusters, which while borrowing from financial institution cross guarantee with each other, thus solving not only collateral problem, but also facilitating use of new technologies relating to production and marketing of their products, but this holds good only when all the firms in a cluster are complementary to each other.
Secondly, for the success of this mechanism government's intervention is needed at initial stage for the development of needed infrastructure in the locality and for facilitating marketing of products/services.
Since SME sector mainly grows on the strength of obtaining sub-contracts from large scale industries, thus it facilitates establishment of small scale firms in cluster, producing complementary goods and services in localities nearby large scale manufacturing firms.
This particular strategy of seeking subcontracts in groups or cluster ease up capital constraints and also save overhead costs thus ensuring viability of small scale industries which continue to remain in disadvantaged environments. No doubt there is a move to set up industrial zones/cities of small scale manufacturing firms within a metropolitan city like Karachi, but for the success of this venture the above conditions must exist.
Comments
Comments are closed.