Miriam Doerr @ stock.adobe.com
The category of microfinance encompasses rotating savings societies, club pools, and financial services associations. These institutions facilitate access to financial services among unbanked low-income citizens. Group micro-lending is a business model used by these institutions to expand microcredit programs to groups instead of targeting individuals. This credit modality builds creditworthy social networks, in such a way that resembles the premise of other innovative solutions like Mobile Money.
Besides economically empowering individuals, group micro-lending models promote proper education and training for customers with little experience to improve their financial performance, as it fosters group connections. Following the higher performance of joint liability evidence, group micro-lending offers different sets of dynamic incentives to group loans such as collective rating to access future eligibility.
However, apart from the benefits mentioned above, group lending faces some setbacks. Additional costs to promote formation, training, and group supervision may increase interest rates of loans. Also, joint liability can offer unexpectable collateral effects, such as embarrassment and social punishment of those individuals that jeopardize repayments. Furthermore, since such borrowers know each other, peer pressure and social ties have been observed among lower group members.
Alleviating Poverty (With Some Constraints)
With the proliferation of microfinance institutions and consequently increasing competition, more and more, the institutional approach should focus on financial sustainability and efficiency to cover their operating and funding costs with program revenue. In the following years, a welfare approach might be crucial to balance financial self-sustainability along with the goal of poverty alleviation. Having a Social Program Matching Database could help mitigate this issue by targeting individuals more specifically.
Group Micro-lending is a prolific innovation to unlock new capital sources for those of the most need and it is currently a topic of academic research in institutions such as the Massachusetts Institute of Technology (MIT). In Thailand, however, the application of group micro-lending "[...] is improving risk-pricing by embedding a discount for safe borrowers, and can thus explain part of the unprecedented rise in the financial intermediation among the world's poor; but that a potential pitfall of voluntary group formation is antidiversification, which points to strategies for lender intervention."
In China, on the other hand, the Ant Group is boosting the oversight of online micro-lending in ways that are comparable to existing applications such as Ant Cash Now and WeChat Loan. According to Ant Group’s prospectus, its micro-lending technology platform has already earned 28.5 billion yuan in the first half of 2020, which accounts for 39.41% of its overall revenue. The next step is working on the compliance of fintechs in Chinese territory. Since these companies represent themselves as internet companies rather than financial enterprises, there is a regulatory gray zone that could be more easily solved overseas, but in China, these nuances are still being discussed.