MICROCAPITAL.ORG STORY: Wall Street Journal Warns Of Negative Consequences Of Group Lending

In a report in the Wall Street Journal [1] entitled ‘Group Borrowing Leads to Pressure’ [2], the reporter Ketaki Gokhale reiterated the point made on prior occasions that the social pressure associated with group lending techniques in the microfinance sector can have damaging consequences. Microlenders argue that for borrowers who are unable to supply collateral or have no borrowing history, group lending is often the only way to ensure repayment. Borrowers are organized into groups and are made to guarantee each other’s loans. This report is one of a several articles recently published on the Wall Street Journal on microfinance which are referred to in the Bibliography section below [5], [6].

Mr S. Panchakshari, operations manager of the Bangalore-based BSS Microfinance Private Ltd [3]., was quoted as stating in an email that “most of the members can cheat us, therefore we give loans only on group guarantee.” Mr Samit Ghosh, the founder of Ujjivan [4], another Bangalore-based microlender added tha borrowers within a group are expected to “support each other in times of trouble”.

In the Wall Street Journal article, Mr Gokhale cites as an example the experience of Ms Hasina Bano, a 27 year old mother of three who makes USD 8 a week in a silk factory. Ms Bano has to make a weekly payment of USD 7.20 to her microlender and has struggled with repayments for years. She is under significant pressure from her group mates who cannot secure new loans until she has repaid her portion. Ms Bano was quoted as stating that she had never taken loans before the microlenders started operations in her town. Now she feels obliged to take out a new loan with a different group of women to pay off her existing debts. She has also sold off her valuable possessions — a mixer, a television, some brass vessels, a water boiler, the family’s mobile phone and a government ration card which gives her access to oil rice. Another borrower, Ms Lalitha Sharma, was quoted as stating that the communal aspect of microlending has led to “fighting between friends, and even sisters.”

According to recent data set out in a Microcapital.Org White Paper by Mr Marco Coppoolse entitled ‘Will Microfinance Stay as a Separate Asset Class’ [7], group lending and joint liability groups (which were once perceived as a key to low default rates in microfinance) no longer appear to be the norm.

By Chinq Yee Chong, Research Assistant

Bibliography

[1] The Wall Street Journal: http://online.wsj.com/

[2] The Wall Street Journal article entitled ‘Group Borrowing Leads to Pressure’: http://online.wsj.com/article/SB125008232217325553.html

[3] BSS: http://www.mixmarket.org/mfi/bss

[4] Ujjivan: www.ujjivan.com/

[5] MICROCAPITAL.ORG STORY: Wall Street Journal Reports That While Microfinance Funds Have Previously Paid Off Some Investors Are Concerned About Future Prospects of Microfinance Industry In The Current Economic Downturn

[6] Wall Street Journal article on ‘A Global Surge In Tiny Loans Spurs Credit Bubble In Slums’: http://online.wsj.com/article/SB125012112518027581.html#articleTabs%3Darticle

[7] Microcapital.Org White Paper entitled ‘Will Microfinance Stay as a Separate Asset Class?’: https://www.microcapital.org/downloads/whitepapers/Will_Microfinance_Remain_A_Separate_Asset_Class.pdf