Microcredit lending models: group, village banking and individual loans
Microcredit providers use a few core lending methodologies. Each one solves the problem of lending without collateral in a different way.
Solidarity groups
Small groups, typically three to ten borrowers, receive individual loans but guarantee each other’s repayment. This model was popularised in Latin America by ACCION affiliates and by PRODEM/BancoSol in Bolivia.
- Strength: members choose each other, so they screen out risky borrowers.
- Weakness: good borrowers may resent paying for others, and groups can break up after a default.
Grameen-style group lending
The Grameen Bank model organises borrowers into groups of five, federated into centres that meet weekly with a loan officer. Repayments are made in public, which creates social pressure and transparency. Grameen later relaxed strict joint liability in its “Grameen II” redesign in the early 2000s.
Village banking
A community-based group of roughly 20 to 50 members, often women, receives a loan from an external lender and lends it on to its members. The group also builds an internal savings fund. FINCA popularised village banking from the mid-1980s.
Self-help groups (SHGs)
Common in India, SHGs of about 10 to 20 members save first, lend internally and are then linked to banks for larger loans. The SHG–Bank Linkage Programme led by NABARD is one of the largest microfinance programmes in the world by number of households.
Individual lending
Loans go to a single client, assessed on business cash flow, character, references and sometimes informal collateral such as household assets. Individual lending suits larger and more established microenterprises, and many clients “graduate” to it from group loans.
Comparing the models
| Model | Typical loan size | Main risk control | Cost to deliver |
|---|---|---|---|
| Solidarity group | Small | Peer guarantee | Low–medium |
| Grameen centre | Very small | Public weekly meetings | Medium |
| Village banking | Very small | Group management | Low |
| Self-help group | Small | Savings + bank linkage | Low |
| Individual | Larger | Cash-flow analysis | High |
Research has found that individual liability can perform similarly to joint liability in some settings. For example, a randomised trial in the Philippines found that removing joint liability did not increase default. Many lenders now combine features of several models.