Solidarity Lending - Distinctivess

Distinctivess

Tapping social capital to lend money is not new to microfinance. Earlier precedents include the informal practices of ROSCAs and the bonds of association used in credit unions. In India, the practice of self-help group banking is inspired by similar principles.

However, solidarity groups are distinctly different from earlier approaches in several important ways.

First, solidarity groups are very small, typically involving 5 individuals who are allowed to choose one another but cannot be related. Five is often cited as an ideal size because it is:

• small enough to ensure a maximum level of joint responsibility and discourage free riders, and
• large enough to prevent the misfortune or incompetence of one person from causing the group to collapse.

Much evidence has also shown that social pressure is more effective among women than among men. The vast majority of loans using this methodology are delivered to women.

Learning from the failure of the Comilla Model of cooperative credit piloted by Akhtar Hameed Khan in the 1950s and '60s, Grameen Bank and many other microcredit institutions have also taken an assertive approach to targeting poor women and excluding non-poor individuals entirely.

A major reason for the prior failure of credit cooperatives in Bangladesh was that the groups were too big and consisted of people with varied economic backgrounds. These large groups did not work because the more affluent members captured the organizations.