Transmittal Group Lending Model as an Innovative Alternative for Managing Risk and Reducing Cost in Micro-Lending

Abstract

The relevance of micro-lending in battling poverty and encouraging sustainability of the poor is more vividly seen after the emergence of Bangladesh-based Grameen Bank as a successful microfinance institution in 2006. Creating a sustainable microfinance institution largely depends on the two important factors; cost and risk. This paper examines the common risks and costs associated with micro lending, vis-à-vis the trade-off that results into higher costs the more risks are well managed, and higher risks the more costs are highly reduced. As the popular ‘group lending’ model is patronised by the majority MFIs around the world, this paper has gone beyond to suggest the adoption of a new concept in group lending management; the Transmittal Lending model. This new model is theoretically described to optimise the two conflicting variables of risk and costs, so as to enhance an MFI’s profitability and sustainability, simultaneously. The general methodology applied is a review on relevant literature so as to find previously established research opinions that will support the new group lending model. Nevertheless, this new model needs to be quantitatively tested by researchers in the field to deeply understand the dynamics of its applicability in the industry.