Dynamics of Group Lending Mechanism and the Role of Group Leaders in Developing Countries

Abstract

Group lending mechanisms have increasingly become popular among microfinance providers in recent years. This is largely due to its ability to leverage joint liability to increase loan repayments whilst promoting an entrepreneurial spirit among borrowers. Meanwhile, a group-lending mechanism is also very important in promoting women's empowerment through cooperative engagements of all group members. However, the effectiveness of the group lending methodology in the delivery of microfinance within a developing country context is largely under-researched. Using data from extensive focus groups interviews of women borrowers held in Nigeria among participants from 150 different groups, this article analyses the dynamics of group lending mechanism (group formation, peer monitoring, pressure and support). The article widens the current narrow literature on group leaders by providing a detailed empirical account of the activities of group leaders in a microfinance intervention. The findings showed that because group leaders are primarily held liable for loan delinquency of group members, they are more highly motivated than other members to monitor and pressure members. The results also suggest that while group leaders were found to perform vital roles, some of these group leaders abused their positions in ways that undermine group cohesion and microfinance sustainability. Lastly, the article introduces the “multiple card phenomenon” in group-based microfinance intervention.