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The role of groups and credit cooperatives in rural lending

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Author Info
Huppi, Monika
Feder, Gershon

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

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References listed on IDEAS
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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.
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  1. 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. [Downloadable!]
    Other versions:
  2. 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. [Downloadable!]
    Other versions:
  3. Glenn D. Westley & Sherrill Shaffer, 1998. "Credit union policies and performance in Latin America," Working Papers 98-1, Federal Reserve Bank of Philadelphia. [Downloadable!]
    Other versions:
  4. Seth Carpenter & Loic Sadoulet, 2000. "Risk-Matching in Credit Groups: Evidence from Guatemala," Econometric Society World Congress 2000 Contributed Papers 1310, Econometric Society. [Downloadable!]
  5. Zeller, Manfred, 1996. "Determinants of repayment performance in credit groups," FCND discussion papers 13, International Food Policy Research Institute (IFPRI). [Downloadable!]
  6. Zeller, Manfred, 1994. "Determinants of credit rationing," FCND discussion papers 2, International Food Policy Research Institute (IFPRI). [Downloadable!]
  7. 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). [Downloadable!]
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This page was last updated on 2008-10-3.

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