The Role of Groups and Credit Cooperatives in Rural Lending

This paper reviews experiences with group lending and credit cooperatives in rural areas of developing countries and attempts to derive lessons for World Bank policy.

Failure of specialized financial institutions to supply small farmers with adequate amounts of credit has led to the growth of group and cooperative lending. Study findings indicate that:

• Small, homogeneous borrowing groups, which are jointly liable and assume managerial and supervisory responsibilities, achieve high repayment rates;
• Establishment of a common bond other than credit, such as mandatory deposits, enhance loan repayment and introduces savings mobilization;
• Most effective and least costly way of enforcing joint liability is to deny access to future credit to all group members in case of default by the group or any member;
• Savings generation can help in developing crucial skills such as financial responsibility and improving repayment performance;
• Cooperatives that focus on well-trained managers, bottom-up institutional development and training at the grass roots level have yielded good results.

Finally, rural financial cooperatives should not be linked with other services before they achieve institutional and financial prerequisites.