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Many IFAD-financed projects have systematically tried to establish groups or associations, such as village groups (VGs), economic interest groups (EIGs) and village associations (VAs), to serve as intermediaries between lending institutions (these may or may not be present in the field) and borrowers. Such groups have also been channels for development activities, such as agricultural extension. Group membership is a pre-requisite for accessing credit. The group is expected to analyse the need for credit by its members and take responsibility for its distribution among them. Consequently, the lending institution should be able to limit the tasks associated with loan administration and collection and achieve economies of scale. Participation in a group provides a collective guarantee or group collateral for members. However, in reality:
- Groups have not been able to maintain records to follow-up on individual borrowers. There is little transparency within the group, as most information about operations is kept by the group leaders, who have little accountability to the members. This intensifies the power of the leader and can lead to irregularities: Inappropriate use of funds is not uncommon. An additional problem is that the project or participating lending institution considers the account at the group level only. Problems of repayment are difficult to identify.
- Group collateral usually does not operate as a guarantee. Group guarantees accepted as collateral may not be effective. Lack of an appropriate legal framework makes prosecution through the judicial system impossible; yet this type of guarantee has worked efficiently in decentralized credit systems modeled after the Grameen Bank (e.g., the Rural Credit Project in Guinea and the Small Rural Credit Project in Burkina Faso). Experience explains two reasons for the inadequacy of group guarantees: (i) the size and composition of the group and (ii) the way groups are mobilized. Groups should be limited to 3-6 well-acquainted individuals, as opposed to more than 10 whose only common interest may be getting credit from a project. A preliminary information phase should be held, with explanations and training about group guarantees and credit, as opposed to the rapid, artificial introductory phase included in most projects.
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IFAD target groups (rural women and the poorest farmers) are often under
represented. This is especially true of village associations, that reinforce
the existing power structure of the village. In Fouta Djallon, Guinea
(SRS 012 GU), village associations
are composed of heads of households, principally adult males, often elderly.
Women and youth are in the minority.
This approach is characterized by a large portion of groups which do not repay credit they have received. Such groups are subsequently ineligible for credit and may be excluded from future credit programmes.
Organizing borrowers into groups as a condition for providing credit under projects is not in itself a guarantee of success. The idea of group collateral is often artificial with group solidarity an illusion. Groups have been largely incapable of managing their financial records, facilitating abuses. The wisdom of basing an emerging new financial system on such groups is questionable.
If a suitable financial system is available in the project area, then:
- The role of the group must be limited. The lending institution should administer its own loans both at group and individual borrower levels. Following restructuring of the Caisses Locales de Crédit Agricole Mutuel (CLCAMs), group responsibility has been reduced to that of a guarantor, to limit irregularities within the groups. Provision of individual credit and loan monitoring are carried out by the CLCAMs.
- The training period prior to group formation should receive careful attention. Collaboration with NGOs may be worthwhile, as long as there is close coordination with the lending organization concerned.
- Groups should be small (less than 10 people) so that members participate voluntarily, trust each other, and apply effective pressure on each other to repay loans.
In the event that there is no operational financial system in the project area, the use of multi-purpose groups should be avoided. Project support should be focused on promoting a specialized financial system. This approach requires investments in research and training and can easily be considered a separate project itself. Collaboration should be sought with other operators with experience in developing decentralized financial systems.
Select any of the following related project profiles for background information: 056 GU, 101 BE, 103 ML, 187 CG, 198 GH, SRS-011 BF, SRS-012 GU.
