About the influence of microfinance group lending

Charlotte Ochieng

What you need to know:

For the youth, especially young women who don’t have collateral to get loans, look out for institutions that use the group lending approach.

Across the globe, the lack of collateral is a primary barrier that economically excludes individuals notably young people especially women from accessing formal banking services.

To get around this obstacle, the underserved population has resorted to establishing informal community-based financial systems to fulfill their financial requirements.

Informal or formal, financial institutions that offer loans use one of two approaches, individual or group lending. This is the same with the Tier III and IV financial institutions that are on-lending under the Mastercard Foundation Micro and Small Enterprises (MSE) Recovery Fund, a five-year program implemented in partnership with the Financial Sector Deepening Uganda. This initiative was launched in February 2022 and is under the Young Africa Works strategy, which seeks to facilitate direct access to finance 50,000 MSEs (at least 40percent women, 30 percent youth).  

The Fund is working with both Tier 3 and Tier 4 financial institutions. Based on the data so far, one Tier 3 Microfinance institution has effectively employed the group lending methodology for a broader client outreach. Since the Fund’s commencement (just under two years), over 26,000 MSEs have successfully accessed credit, and 60 percent of this has been disbursed by the Microfinance, a testament to its distinctive strategy.

 The Microfinance has disbursed Shs7 billion to 16,166 majority of them youth and women-led enterprises within 12 months. Conversely, two SACCOs that employ an individual lending approach, have managed to extend credit to 842 and 503 enterprises and disbursed Shs 3.4 billion and Shs 2.25 billion respectively within 12 months.

For both approaches, the critical difference is in the collateral criteria. With group lending, all that’s needed is a group guarantee, unlike individual lending products that demand traditional collateral. The Microfinance’s group methodology explores unique features that have positively impacted young people, especially women, and offers lessons for other financial institutions: Here is what makes this institution’s group lending approach work.

Central to the approach is that the institution has dealt with the access to finance obstacle created by the need for traditional collateral. To do this, the institution employs thesegmented and combined group strategy, coupled with the delegation of credit approval authority to group members.

To implement this, Microfinance employs a two-fold group methodology: branch-based and community-based groups. The former gathers at the bank, while the latter convenes locally, delivering tailored flexibility to diverse client needs.

The institution looks out for people organised in groups and creates sub-groups of six to seven members to whom loans are exclusively accessible. These sub-groups operate like well-coordinated “cabinets,” complete with designated leaders. This structure not only encourages governance but also strengthens bonds among members.

The institution’s loan officers play a modest role in the lending process. Group members collectively greenlight loans without the intervention of the bank. This empowers the groups, enabling them to take charge of credit underwriting, member selection, and loan recovery. This proactive approach ensures that disbursed amounts grow, and the quality of loans improves over time.

Once the groups have been formed, members of branch-based groups can access loans up to UShs 5 million per member without the need for collateral. On the other hand, community-based groups can borrow up to Shs 3 million per member, securing approvals at the group level—an embodiment of the Microfinance’s dedication to client empowerment. For more substantial loan amounts, up to Shs 30 million, collateral is a requisite to manage potential risks. This balanced approach ensures that prudent risk mitigation measures are also upheld while empowering clients.  As a result, this dynamic formula has enabled the bank to extend credit to a broader spectrum of customers. Given that women are more likely to belong to groups, the group lending approach is one that financial institutions from Tier 1 to IV should learn from and integrate in order to reach young people, especially women. For the youth, especially young women who don’t have collateral to get loans, look out for institutions that use the group lending approach.

Ms Charlotte Ochieng is the manager and deputy practice group lead, banking and financial services (Anglophone Africa) at MicroSave Consulting.