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The role of groups and credit cooperatives in rural lending

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  • Huppi, Monika
  • Feder, Gershon

Abstract

Processing and collection costs of loans made to small farmers are high relative to the amount lent. Lending groups and credit cooperatives have been ascribed the potential to reach small farmers with affordable credit because the processing of one large loan rather than numerous small loans may allow for savings in administrative costs. These arrangements entail joint liability and reduce the risk of loan default. Some of the factors crucial for successful group lending are: (a) homogeneous borrowing groups that are jointly liable and assume some managerial and supervisory responsibilities; (b) establishing a common bond other than credit to enhance loan repayment as well as introduce savings mobilization; and (c) denying access to future credit to all group members in the case of default by any member. Important factors for succesful outcomes of credit cooperatives include: (a) bottom-up institutional development and training at the grass roots as well as at management levels; (b) savings mobilization by credit cooperatives rendering them financially less dependent on outside sources and enhancing borrowers incentives to repay; and (c) credit cooperatives not rushing to expand their activities beyond financial intermediation.

Suggested Citation

  • Huppi, Monika & Feder, Gershon, 1989. "The role of groups and credit cooperatives in rural lending," Policy Research Working Paper Series 284, The World Bank.
    • Handle: RePEc:wbk:wbrwps:284
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    1. Adams, Dale W. & Vogel, Robert C., 1986. "Rural financial markets in low-income countries: Recent controversies and lessons," World Development, Elsevier, vol. 14(4), pages 477-487, April.
    2. Dale W. Adams & Alfredo Antonio Pablo Romero, 1981. "Group Lending to the Rural Poor in the Dominican Republic: A Stunted Innovation," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 29(2), pages 217-224, July.
    3. Adams, Dale W, 1988. "The Conundrum of Successful Credit Projects in Floundering Rural," Economic Development and Cultural Change, University of Chicago Press, vol. 36(2), pages 355-367, January.
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