Business Admistration Mfis

Group lending approach - Most of the MFIs issue loans without collateral, therefore they require a percentage of the loan saved in advance which is alternatively serve as collateral for the borrower and indicates the regular payments of the borrower. Membership is strictly limited to people who own less than half an acre of land, are not members of the same household as another program member, have similar economic resources, and live in the same village. Experience shows that the spatial and social cohesiveness developed among individuals of the same gender, residing in the same village, and having similar economic backgrounds are important factors in the smooth functioning of these groups (Khandker, Shahidur R. 1998).

All Grameen members in the group repay their loans; the promise of future credit is extended. Furthermore, eight groups of Grameen borrowers are organized into centers and repayment is collected during public meetings. While this ensures transparency, any borrower who defaults is viable to the entire village, which imposes a sense of shame. In rural Bangladesh this societal pressure is a strong disincentive to default on the loan. Generally Grameen initial loans are less than $100 and require weekly repayments that amount to a rate of 10 percent per annum. Weekly repayments give the borrowers and lenders the added benefit of discovering problem early (Sengupta and Aubuchon, 2008). Consequently, the credit worthiness of the borrowers is determined by the members rather than by the MFIs.

Primarily Grameen Bank targets the poor women (97 percent women out of the total borrowers 7.90 million) with a view to make them self-employed and who have the loan repayment record rate of 98 percent. Given these costs it is not clear whether group lending or individual lending involves lower overall transactions costs Joanna Ledgerwood (December1998) describes another disadvantage of group lending demonstrated by Braton (1986) when worse repayment rates in years with some type of crisis.

This "assortative matching" mitigates the adverse selection problem because now the risky borrowers are the ones who must bail out other risky borrowers, while the safe borrowers have to shoulder a lesser subsidy. (Sengupta and Aubuchon, 2008).