Housing microfinance (HMF) has its origins in microfinance lending. One important aspect of microfinance lending that HMF utilises is group lending. A group of individuals, often with social ties, bands together for social and economic support, and microfinance and HMF leverages off such groups to facilitate lending. This is why.
Groups provide additional or alternative forms of security, as repayment of loans is a joint liability. This works because group reputation is at stake and future access to credit for members depends on individuals paying off their loans. Social pressure is brought to bear on individual borrowers by members of the group ensuring they pay for their loans. This is invaluable as a credit control mechanism. Microfinance borrowers are often poor and unable to offer viable or sufficient collateral. Group lending provides a way around this. It also enhances existing social networks, which are critical fall back mechanisms for lower income groups. This is because group lending is often accompanied by support to the group by the lender or another organisation in partnership with it. The lender wants to ensure that the group is functioning optimally as the group is relied on to improve security for loans. Thus typically, lending would include basic support around group governance, financial education and training, support with regard to registration with state authorities and so on. Another major advantage of group lending methodologies is that in environments where often the ability to borrow against collateral is hampered by poor court and registration systems, group lending offers a useful alternative, by-passing these more formal processes when calling on the security.
Group lending methodologies can be disadvantageous however. There is the additional time and cost associated with support for groups. The time is linked to having to assess and often provide support to build-up these groups to sufficiently stable levels. This will have a cost attached to it, which in a commercial lending enterprise will be linked to the cost of the loan, making the overall costs of borrowing higher. In a market targeting lower income price sensitive earners, this is important. Others point out that joint liability in group lending penalises good credit risk customers, constituting a form of “collective punishment “ that can ultimately discourage future borrowing by individuals.
HMF, very much like ordinary microfinance lending, has adopted both individual and group lending methodologies. However, it has also obtained additional advantages from group lending linked to its own unique needs. Apart from replicating advantages such as provision of an alternative form of collateral in environments where selling collateral is difficult, or where people lack the collateral in the first place, group lending can ensure better housing quality outcomes. Housing support services (HSS) can be delivered through the group, and rather than HSS officers visiting individual borrowers to ensure the house meets certain quality standards, groups can instead be utilised to perform this function. Training to ensure quality build for individual loans can thus be directed at groups to enable delivery of HSS. Indeed often within groups, there are people who already have some understanding of how building can and should be done. Fewer visits by HSS officers are spent on individual housing projects, which means HSS as a component of the cost of the loan is less, allowing for greater affordability. The other important advantage group lending provides is linked to the way it works, through peer pressure. HMF requires that loans are used for housing, and not diverted to any other use. Peer pressure from group lending ensures this. It also ensures that any building standards or other specific requirements required by the lender for the build process are adhered to. This is done through the group much more efficiently and effectively using the members themselves. Finally, HMF loans are by their very nature larger than ordinary microfinance loans. Group lending becomes more important in such situations by offering additional collateral for this greater risk. This is important to ensure greater reach of HMF to the poor.
While the disadvantages of group lending such as greater costs associated with group support or the fact there is collective responsibility for the failures of one impact on HMF, there are some additional advantages it offers. These are linked to more efficient and effective delivery of HSS, easier prevention of loan diversion, and allowing greater reach of HMF loans for the poor. Thus while many products target individual lending, group lending still has a critical place in HMF.