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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.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 284.

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Date of creation: 31 Oct 1989
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Handle: RePEc:wbk:wbrwps:284

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Related research

Keywords: Banks&Banking Reform; Strategic Debt Management; Financial Intermediation; International Terrorism&Counterterrorism; Economic Theory&Research;

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References

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  1. 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 355-67, January.
  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, 07.
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Citations

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Cited by:
  1. Zeller, Manfred & Ahmed, Akhter U. & Babu, Suresh Chandra & Broca, Sumiter S. & Diagne, Aliou & Sharma, Manohar, 1996. "Rural finance policies for food security of the poor," FCND discussion papers 11, International Food Policy Research Institute (IFPRI).
  2. Alexopoulos, Yiorgos & Goglio, Silvio, 2011. "Financial Cooperatives: Problems and Challenges in the Post-Crisis Era," Journal of Rural Cooperation, Hebrew University, Center for Agricultural Economic Research, vol. 39(1).
  3. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, vol. 46(1), pages 1-18, February.
  4. Bhatt, Nitin & Tang, Shui-Yan, 1998. "The problem of transaction costs in group-based microlending: An institutional perspective," World Development, Elsevier, vol. 26(4), pages 623-637, April.
  5. Armando Castelar Pinneiro & Célia Cabral, 1999. "Credit Markets in Brazil: The Role of Judicial Enforcement and Other Institutions," Research Department Publications 3066, Inter-American Development Bank, Research Department.
  6. Kasarjyan, Milada, 2011. "Improving the functioning of the rural financial markets of Armenia," Studies on the Agricultural and Food Sector in Central and Eastern Europe, Leib­niz Institute of Agricultural Development in Central and Eastern Europe (IAMO), volume 62, number 62.
  7. Ben Rogaly, 1998. "Combating financial exclusion through co-operatives: is there a role for external assistance?," Journal of International Development, John Wiley & Sons, Ltd., vol. 10(6), pages 823-836.
  8. Brehanu, Amare & Fufa, Bekabil, 2008. "Repayment rate of loans from semi-formal financial institutions among small-scale farmers in Ethiopia: Two-limit Tobit analysis," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 37(6), pages 2221-2230, December.
  9. Van Tassel, Eric, 1999. "Group lending under asymmetric information," Journal of Development Economics, Elsevier, vol. 60(1), pages 3-25, October.
  10. Prabal Roy Chowdhury, 2003. "Group-lending: Sequential financing, lender monitoring and joint liability," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers 04-10, Indian Statistical Institute, New Delhi, India.
  11. Glenn D. Westley & Sherrill Shaffer, 1998. "Credit union policies and performance in Latin America," Working Papers 98-1, Federal Reserve Bank of Philadelphia.
  12. Zeller, Manfred, 1996. "Determinants of repayment performance in credit groups," FCND discussion papers 13, International Food Policy Research Institute (IFPRI).
  13. Deininger, Klaus, 1995. "Collective agricultural production: A solution for transition economies?," World Development, Elsevier, vol. 23(8), pages 1317-1334, August.
  14. Blackman, Allen, 2001. "Why Don't Lenders Finance High-Return Technological Change in Developing-Country Agriculture?," Discussion Papers dp-01-17, Resources For the Future.
  15. Zeller, Manfred, 1994. "Determinants of credit rationing," FCND discussion papers 2, International Food Policy Research Institute (IFPRI).
  16. Coomes, Oliver T., 1996. "State credit programs and the peasantry under populist regimes: Lessons from the APRA experience in the Peruvian Amazon," World Development, Elsevier, vol. 24(8), pages 1333-1346, August.
  17. Sharma, Manohar & Zeller, Manfred, 1997. "Repayment performance in group-based credit programs in Bangladesh: An empirical analysis," World Development, Elsevier, vol. 25(10), pages 1731-1742, October.
  18. Seth Carpenter & Loic Sadoulet, 2000. "Risk-Matching in Credit Groups: Evidence from Guatemala," Econometric Society World Congress 2000 Contributed Papers 1310, Econometric Society.
  19. Barham, Bradford L. & Boucher, Stephen & Carter, Michael R., 1996. "Credit constraints, credit unions, and small-scale producers in Guatemala," World Development, Elsevier, vol. 24(5), pages 793-806, May.

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