Self-Help Groups as Financial Institutions: Policy Implications Using a Financial Model

This paper uses a spreadsheet financial model to identify key financial policy parameters that influence the performance of self-help groups (SHGs) involved in microfinance. It also examines the consequences of a conservative financial policy and of a high interest rate policy at the SHG level.The paper analyzes the policy implications of the financial model output, with SHG "best practices" as a point of reference:

• Financial conservatism at SHG level:
  • A longer self-financing cycle would put the members' money at risk;
  • A higher SHG savings rate with the micro credit institution reduces the loan exposure to members.
• High interest rate policy:
  • Increases loan disbursed to members while enhancing SHG surplus;
  • Can strengthen the pool of funds members have with the group and promote growth based on owned funds.

The paper concludes that in the initial years, institutionalizing group processes is much more important for the sustainability of SHGs than accelerating lending since a small reduction in the loan portfolio quality can seriously damage the SHG.