New Horizons > December 2000

The Benefits of Group Lending

Micro finance is about sustainable development. At ECLOF Kenya (K-ECLOF), we also strive to help build a strong social support system so that as many individual households as possible may feel the impact of our lending activities. Our group lending schemes serve these aims and now make up a major part of our activities.

We introduced group lending in 1994. Today, 70% of our total loan portfolio is disbursed in this way. The methodology is designed after the Grameen Model but has been modified to suit the local situation.

K-ECLOF runs two main group lending schemes: the jiwezeshe (Swahili for ‘help yourself’) and the diakonia. (Greek for ‘service’). In these two schemes, loans are made only to groups whose members already have micro-enterprise businesses or are involved in farming activities.

We operate in four main areas in the country: the Mt. Kenya Region, Nairobi East, Nairobi West and the Rift Valley/Western Kenya. Each area has an average of two credit officers who handle 500–600 clients each. This is a high ratio compared to the average within the micro finance world. However, we make sure most of our clientele is within our service area and this reduces the travelling time and costs of our officers. Recently, ECLOF Geneva assisted us in acquiring four motorcycles for credit officers so they can get about more effectively. Each group to whom we lend is made up of between 15 to 30 members, and they are encouraged to form watanos (cells) of 5 persons each. The aim of the cells is to encourage the building of close relationships among the members. However, we lend only to groups, and not to individual cells.

Promotion
Credit Officers promote our group lending schemes among entrepreneurs by direct contact, announcements in churches, word of mouth and public meetings facilitated by local government officials.

For example, when K-ECLOF goes into a new area for the first time, we approach the district social development officer for a list of all the names of registered groups who operate a rotating savings club. In Kenya, such a club is known as a merry-go-round. Every month, each member pays in an agreed amount. Then, each month, the total amount collected is given, in turn, to one of the club members until all have received a payment. Some of these merry-go-rounds are registered with the Ministry of Culture and Social Services as self-help groups.

Membership criteria
Our criteria for membership are based on locality and occupation. Groups accepted must already have some economic activity within ECLOF’s area of operation. They should preferably have existed and operated their own savings and credit activities for at least one year and must have an account with a local commercial bank. For a group to access a loan, it must have saved at least 10% of the total project cost, as evidenced by a bank statement. Today, we have a total of 189 groups with total savings of about US$130,000. Selection based on these criteria guarantees that loans are given only to mature groups whose members already know and trust one another.

Training
K-ECLOF provides an initial orientation and training programme for new group members. Our objectives, policies, regulations and products are explained from the beginning so that the groups identify with the programme. We also teach basic book keeping, leadership and documentation skills. Savings mobilisation is an integral part of group activities. The savings act as collateral and, by having our credit officers as signatories to the accounts for the period of the loan, we ensure that the savings cannot be withdrawn. Groups are however encouraged to continue saving for the duration of the loan to increase their capital and security for future loans. We hope that, in this way, groups will reach a point where they no longer need institutional loans.

Lending methodology
We keep loan application procedures very simple to ensure that even those who are not very literate can complete them.

Group leaders do the initial appraisal as they are in a better position to know how much the business can absorb and whether the individuals can repay the amount for which they have applied. The leaders screen and approve or reject each member’s application.

The credit officers later verify approved applications to ascertain viability and repayment capacity. First loans are relatively small with a ceiling of US$385, while second loans have a ceiling of US$770 per member. After disbursement of the loans, the credit officers visit the groups as frequently as possible to confirm that the loans are being used in line with the purposes given in the applications. These checks easily identify problems that could affect repayment in the future.

Loans are given for individual projects and are repaid within one year or less. Each group meets weekly or monthly to transact its savings schemes and make its ECLOF loan repayments. The credit officer is welcome in the meetings and often serves as an advisor on many issues.

Administering credit to groups, rather than individuals, considerably reduces the credit officers’ time for loan appraisal, follow-up and recoveries.

Performance
Performance, in terms of outreach, has improved over the years. Default rates are low in the small-trade loans category. It is, however, the responsibility of the groups to repay and the leaders co-ordinate collection and repayment. A penalty of 5% is levied on late repayments.

As of June 2000, the repayment rate of K-ECLOF’s group lending schemes is 95%. This positive figure is due to the fact that members of the groups make repayments at their monthly meeting. If any member is not able to pay an instalment, the group pays instead, and later collects this amount from the member. In times of need, when a member is unable to pay his or her loan instalment, the group gives the merry-go-round savings to that member. This enables the member to pay without defaulting. All are jointly liable for the loans and even if only one member does not repay no further loans can be given to that group, and the members’ savings are used to offset outstanding repayments. This encourages each member to repay his or her loans. In the case of the Uruku-Arithi group, one of the members died and the other members paid off his loan and later accepted a relative of the deceased to replace him in the group.

Obstacles to expansion
One of the major challenges facing K-ECLOF is to expand and deepen our outreach. Given the potential number of clients and staff available, it is difficult to do this. Also, the risks associated with agricultural lending are very real.

Drought in Kenya, especially in Eldoret this year, has meant that repayments could not be made in time, and we have had to reschedule loans. One of the major weaknesses of group lending schemes is the assumption that each business has the same gestation period. Most of our group clients have businesses that have different turnovers and therefore different working capital requirements. This calls for a system where individual needs for loans should be given special treatment. K-ECLOF has to set up an effective management information system that can track individual transactions and ensure that the organization is responsive to clients’ individual needs.

Results
We are also pleased to report that women are well represented among the members of the groups involved in K-ECLOF’s group lending schemes.

We anticipate that basic living standards will improve as average incomes from businesses rise. The increases will create more jobs and therefore more stable families, supported by new incomes and employment. As basic needs are met, borrowers will be able to put more effort into other income-generating projects, e.g. irrigation projects, and therefore maximise the use of available resources.

The positive changes brought about by group lending will also help reduce migration from rural to urban areas, and bring down the currently high infant mortality rate. Parents will be able to afford to pay for better schooling for their children, and do so beyond primary education. The overall life expectancy of children will also be greater.

K-ECLOF is not complacent and knows the future holds substantial challenges, but we are justifiably proud of what our group lending schemes have achieved so far.

James Rukenya, a 40 year-old father of four, runs a handcart leasing business in Thika Town. Before he went into this line of work, Mr Rukenya sold utensils and second-hand clothes. However, with many similar businesses in town, he decided to leave the clothes selling business in the hands of his wife and venture into the world of handcarts.

Mr Rukenya is a member of the Mukunu Group whose individual members sell a variety of merchandise, including electrical goods, clothes and shoes. The group began as a merry-go-round savings scheme (see main article) from which they borrowed emergency funds at times of need. One of ECLOF Kenya’s credit officers introduced the group to the organization from whom they now borrow funds for use as working capital.

Mr Rukenya received an ECLOF loan of US$380 and used it to add two handcarts to his existing stock of 38. He leases the handcarts out to individuals who, in turn, use them to transport goods for business people in town. Now, with an income of US$300 per month, Mr Rukenya is able to reinvest some of this money into his business and also take care of his family. He has now applied for another loan of US$900 and has ambitious plans for the future.

Kenya ECLOF came to Thika Town two years ago and targets small traders. According to Mr Rukenya, he and other members of his group prefer the ECLOF programme to other credit schemes because the interest rate is fair, and the monthly repayment requirement is better than the weekly repayments demanded by other credit programmes. Mr Rukenya and his group would like to see a situation where ECLOF loans have no ceilings, and where a member who completes payment ahead of schedule can receive other loans without waiting for the whole group to make their repayments.

Julius Meme is a farmer and a member of the Kigene Cirimu smallholders’ irrigation project in the Meru District of Kenya’s Central Province.

Rain falls in this area during one season only each year. Julius Meme keeps crossbreed cattle and grows crops, which include flowers, French beans and other vegetables. The animals and crops require a constant supply of water. Mr Meme’s fellow farmers have the same need for water. There is also the usual domestic need for a water supply. Outside of the rainy season, water is available but it is in streams three to four kilometres away at the bottom of the steep hillsides that characterise this region.

Before the irrigation project began, Mr Meme could only cultivate half his farmland, and even then only during the rainy season. He could therefore only get one harvest of crops each year. Now the community has enough water all year round for both domestic and agricultural use. Mr Meme’s wife and daughters no longer have to walk long distances to fetch water for use in the home. As a result of the irrigation project, financed by an ECLOF loan, this farmer’s income has increased from US$150 to US$250 per month.

Mr Meme and the other members of his community heard about the ECLOF group lending scheme and put their savings together in order to receive a loan for the irrigation project. They received a loan of US$23,000 repayable within three years. They bought pipes and fittings and installed the irrigation system. The group consists of over 100 members and so each member has to pay back only US$7 per month.

ECLOF’s group lending scheme has given this community much needed water, and helped them spread the burden of the loan and overcome the requirement for collateral.