Jeffrey Ashe , Columbia University, Director Grass Roots Finance Action (grassrootsfinanceaction.org) , United States
11 January 2023

Christopher,

Thank you for your question. First the bad before I talk about the good. There is a mismatch between the objective of the bank which is to make money while putting the group's fund at risk in case of loan payment issues. What typically happens is that the bank makes expensive loans to the group and are often larger than the group can manage and with too little due diligence about the quality of the groups. The group has its own set of problems managing this sudden influx of money and often provides loans that are too large to the better off members of the group who often default, the group loses its equity and the group collapses. Often banks hire the savings group trainers and reward them for making these too large loans using the trust they have established with the groups. The Niger, for example, on average, the more groups receive external the more likely it is that they will disband.

In contrast, in India, with the self-help group bank linkage initiative, external loans operate as you suggest, with the additional capital provided by the bank at a low interest rate, relent to the members at a higher interest rate with the group repaying the bank and still coming out ahead. From what I have read, the injections of external capital from the bank has enabled members to grow their businesses and farms more quickly. Even this story is not as simple as it seems. If you (or any of you reading this response want to discuss this further we can set up a call. Check out our website grassrootsfinanceaction.org. Contact me at jeffaashe@gmail.com