Definition
A group loan is a financial arrangement/mechanism where a group of individuals, often from similar backgrounds or communities, collectively borrow money from a financial institution. This type of loan is typically designed to facilitate access to credit for individuals who may not qualify for individual loans due to lack of collateral or credit history. For banks, a group loan is simpler to manage compared to many individual loans. Social control within a group can also enhance accountability and reduce the risk of default as group members often support and check-up on each other.
Lead Actors
Financial Service Provider
Target Demographics
Homogeneous producer groups; Producers
Objectives addressed
Farmer related
Improve yields:
Access to working capital can enable farmers to invest more in their farms, which may lead to higher productivity. Farmers who can afford improved inputs, such as certified seeds, are often better positioned to achieve stronger yields. When combined with training on good agricultural practices (GAPs) and climate-smart agriculture (CSA), access to finance can support improved crop management. Overall, access to the necessary resources may contribute to better and more consistent yields.
Increase farmer income:
Group lending can enable farmers to access improved inputs and practices, contributing to higher yields and, in turn, increased incomes. It may also enhance market access, as farmers can collectively negotiate better prices. By facilitating both higher production and stronger market positioning, group loans play an important role in supporting farmers’ income growth.
Boost access to finance:
By pooling resources and sharing responsibilities, farmers that otherwise experience difficulties to access finance, can now more easily secure a loan. The barriers to entry tend to be lower as financial institutions consider the risk or a group loan to be lower.
Strengthen income stability:
Group loans often include insurance products that help farmers manage the risks of crop failure. Access to finance also enables farmers to diversify crops or engage in additional income-generating activities. By investing in their farms and purchasing quality seeds, farmers can improve yields and crop quality, contributing to a more stable income. Overall, group loans not only support risk management and investment but also help farmers build more stable and resilient incomes.
Business related
Reduce cost-to-serve:
Group loans enable FIs to serve multiple borrowers at once, lowering overall transaction costs associated with loan processing and management (e.g. administrative, loan collection, risk management).
Lower credit losses:
Group lending often means group members are collectively responsible for repayment of the loan. The social control among members can reduce the risk of default.
Contexts Best Suited to
Degree of farmer organisation: where formal groups are already established.
Tight groups with strong peer monitoring/social control: where the chance of intra-group conflict is low.
Tight groups with strong peer monitoring/social control: where the chance of intra-group conflict is low.
Key Risks
Misunderstandings: Lack of understanding/ limited financial literacy of group members.
Default risk: if one or more group members default this can lead to discouragement within the group.
Lack of organisation: groups that aren't well organised might struggle with accountability & loan repayment management.
Market risks: fluctuations in market prices for agri products can impact the ability of group members to repay the loan.
Default risk: if one or more group members default this can lead to discouragement within the group.
Lack of organisation: groups that aren't well organised might struggle with accountability & loan repayment management.
Market risks: fluctuations in market prices for agri products can impact the ability of group members to repay the loan.
Environmental Impact
Ambiguous:
Group lending aims to facilitate farmers can access quality inputs which can be better for the soil & environment. When group lending is combined with additional services, such as GAP training, there might be a positive environmental impact. However, it can also facilitate negative environmental practices such as over-usage of inputs.
Ambition level
Medium
Time
Organising farmers into a group generally requires some time. Moreover, making sure everyone is committed, understands the concept of a group loan and provides the required credit information can be time consuming.
Investment Need
Development of a loan product suitable for a specific group requires some but limited investment. Financial providers may also need to invest in systems/technology and personnel to monitor the group and the loan repayment.
