Joint Liability Groups Research Articles

Agricultural Credit in India – Innovations in Design and Delivery of Products and Services

The concept of bringing farmers together in a voluntary group was initiated in 1982 through the Farmers’ Club Programme. This institutional innovation has received a renewed focus from 2007–08 onwards. Nevertheless, access to farm credit sector has not been easy and adequate. In this paper, innovative approaches to improve agricultural credit flow have been captured from the secondary sources and analysed using compound annual growth rate and descriptive analytical tools. The share of private moneylenders has decreased with the institutional agencies making inroads into the rural scene. The structure of the sources of credit has witnessed a clear shift wherein the scheduled commercial banks and RRBs have emerged as the major sources of direct and indirect institutional credit to agriculture in recent years. The SHG-bank linkage programme, Kisan Credit Card, Farmers Clubs, Joint Liability Groups and Interest Subvention Scheme have been promoted to supplement rural credit delivery effectively and have also shown a significantly increasing growth rates over the years. In addition, there are a number of other small innovations that have taken place across the spectrum of agricultural credit markets. All these would eventually contribute to making sustainable access to agricultural finance leading towards a path for prosperity of farming community, especially the small and vulnerable farm households.

Financing the SME Value Chains

Asia’s economic miracle is often associated with large, multi-national companies. While these organizations have been important drivers of the region’s growth, small and medium enterprises (SMEs) accounting for more than 98% of the enterprises have played a key role. These SMEs contribute around 40% to their country’s GDP in the ASEAN region. In developed nations such as the USA, UK, France and Singapore, SMEs contribute more than half of their country’s GDP.Addressing SMEs’ needs for finance, it is assessed that formal financial lending organizations represent a weak link in the financial supply chain for SMEs in the region. The problem also hinders the physical supply chain in that SME’s are key drivers of business growth in the region. This paper proposes a framework for financial lending to allow formal lending organizations to compete with the alternate sources of finance SMEs seek.This research work is built upon case studies from Malaysia and India, and surveys conducted on the supply and demand of SME finance in Malaysia. A lack of collateral and limited access to venture and growth capital are some of the obstacles that SME owners face when seeking finance for their businesses. Cash flow shortages caused by long or delayed payment cycles exacerbate the problem. On the supply side, a number of issues including high transactions costs, inadequate information about borrowers and weak governance, deter large banks from developing SME lending portfolios. In the absence of bank lending options many SMEs turn to other sources of finance such as unregistered money lenders that charge high interest rates. It is realized that the local money lenders are accessible and understand the SME business model better. They are also able to keep a tight rein on costs and have developed ways to make sure that investment funds are used by borrowers for profit-making purposes.This work identifies nine areas of demand for capital, including funds to pay for fixed assets and raw materials, to pay for seasonal periods of low demand, and to ramp up operations ahead of product launches. In addition to money lenders, SME’s typically use eight types of financing options including family and friends, micro finance institutions and owner’s equity. There are also various government schemes to help SMEs find the financing they need, but the research finds that that penetration is a key challenge to these interventions. These programs only reach a relatively small fraction of the total population of businesses.The lack of affordable financing options stymies the growth of SMEs in Asia. This work suggests that banks in the region need to redesign their lending portfolios so that they are better able to evaluate and manage the SME’s needs for finance. To help clarify the risks, this paper includes a grid showing how the different sources of SME financing are weighed in terms of the so-called 5Cs: capacity, capital, character, collateral and condition. It is recommended that banks should adopt more innovative ways to analyze SME loans, and gain a deeper understanding of how these enterprises fund their supply chains.This does not necessarily require a complete overhaul of current practices; financial institutions can tap into the SME market by learning to work within current financing systems. To this end, MISI describes 11 key devices that can be leveraged to catalyze the lending process. For example, Joint Liability Groups comprise farmers with compatible businesses who come together to borrow from financial institutions. Group members can borrow individually or collectively by offering mutual guarantees for each other. Technological advances such as the growth of internet banking and electronic funds transfers can also be harnessed to facilitate SME lending. New standards such as the Bank Payment Obligation (BPO) rolled out by SWIFT and the International Chamber of Commerce (ICC) are helping to unlock IT-related advances in banking.With mass customization and fragmentation of manufacturing, creating a viable market for SME financing benefits both the financial institutions and the enterprises involved. Regional and global supply chains also benefit in that there is an increasing need for sustainable and financially viable SMEs in Asia. This work thus addresses the factors responsible for widening the supply - demand gap for SME finance by studying the flow of finance through SME supply chains.

Community-based microfinance: the potential and challenges of self-reliant, self-help group cooperatives

Microfinance services in India are delivered through many channels: self-help and joint liability groups, banks, non-banking financial companies, cooperatives, and post offices. Cooperatives had lost ground but the introduction of new laws allows self-financed cooperatives to operate free of government interference. Using this law, self-help promoting institutions (SHPIs) have federated self-help groups (SHGs) into self-reliant cooperatives. This paper uses a case study of cooperatives in Karnataka State, India, to consider questions about enabling and limiting factors in promoting self-reliant cooperatives. The lessons show that when financial and managerial sustainability is achieved, member-owned institutions give the best financial returns to members from microfinance operations, besides giving decision-making power, and improving the positioning of women-owned organizations vis-à-vis formal financial institutions. Setting up governance and financial systems can, however, be constrained by low incomes and low literacy of members, and attitudes and rules of government and banks.

Joint Liability Groups (JLGs) – The Saviors of Urban Poor

According to the latest research done by the World Bank, India is home to almost one third of the world’s poor (surviving on an equivalent of one dollar a day). Though many central government and state government poverty alleviation programs are currently active in India, microfinance plays a major contributor to financial inclusion. In the past few decades it has helped out remarkably in eradicating poverty. Reports show that people who have taken microfinance have been able to increase their income and hence the standard of living. Microfinance is not just about giving micro credit to the poor rather it is an economic development tool whose objective is to assist poor to work their way out of poverty. It covers a wide range of services like credit, savings, insurance, remittance and also non-financial services like training, counseling etc. Microfinance institutions serve as a supplement to banks and in some sense a better one too. The main two forms of group-based credit are Self-Help Group (SHG) & Joint Liability Group (JLG).This paper discusses all about the Joint Liability Groups.

Microfinance and Mechanism of Group Lending: Theory and Experiences

It is generally accepted that the micro-finance sector emerged as an answer to financial market failures. In this context, the paper examines the basic idea on which micro-finance is built and sees how it is different from the mainstream financial service providers. The present paper therefore, deals with the theoretical framework of microfinance including definition, economics and mechanism of group lending, gender aspects and limitations of microfinance. One of the major features of microfinance is group lending where the concept of joint-liability helps in mitigating problems caused by adverse selection and moral hazard. Other important mechanisms, besides group lending, are the use of dynamic incentives, collateral substitutes, and regular repayment schedules, the targeting of women and social programmes which, according to theory, play a significant role. The paper also discusses about the relation between the models of Joint Liability Group lending. There has been considerable debate over whether micro-finance can reach the ‘poorest of the poor’ and it has also been highlighted in the paper. The micro-finance programme is ideologically designed to achieve women's contribution to family welfare and assist poor women to obtain socio-economic empowerment, but often the positional vulnerability of the women is exploited at the time of repayment. Thus the paper also highlights the limitations of micro-finance forwarded by Ohio School of Development Finance which stated that debt is not an effective tool for helping most of poor people to enhance their economic conditions as they operate in small farms or micro enterprises.

Lending to the Unbankable - Dynamic Incentives and Joint Liability in a Trust Game with Social Collateral

Existence of asymmetric information and lack of collateral in informal financial markets creates a suboptimal allocation of financial resources to those in most need. When borrowers (safe and risky), approach financial institutions, the presence of moral hazard and adverse selection results in no lending. Conversely, group borrowing - either individual under joint liability contract or group based - generating a trust game between borrowers, controls for information asymmetries and creates a cooperative trust game with an undominated optimal solution to repay, and therefore for the lender to Give. MC programs based on group lending under joint liability, dynamic lending and with social cost for defaulting contracts prove superior to typical individual borrowing and lending when no collateral is available. These contracts and correspondent payoffs are Pareto Efficient.

The Empirics of Microfinance: What Do we know?

Microfinance has received a lot of attention recently, both from policy makers as well as in academic circles. Two of the main topics that have been hotly debated are explaining joint liability group lending and its implications for reducing information asymmetries, and the trade-off between the financial sustainability and outreach of microfinance programmes. This Feature contains three novel empirical contributions providing new insights with respect to why and how joint liability group lending works. It also contains the first large-scale systematic analysis of the trade-off between financial performance and outreach of microfinance institutions.