Solidarity lending
Solidarity lending lowers the costs to a financial institution related to assessing, managing and collecting loans, and can eliminate the need for collateral.
Instead, solidarity lending levers various types of social capital like peer pressure, mutual support and a healthy culture of repayment.
These characteristics make solidarity lending more useful in rural villages than in urban centres where mobility is greater and social capital is weaker.
For example, the Calmeadow Foundation tested an analogous 'peer lending' model in three locations in Canada: rural Nova Scotia and urban Toronto and Vancouver during the 1990s.
Learning from the failure of the Comilla Model of cooperative credit piloted by Akhtar Hameed Khan in the 1950s and '60s, Grameen Bank and many other microcredit institutions have also taken an assertive approach to targeting poor women and excluding non-poor individuals entirely.
A major reason for the prior failure of credit cooperatives in Bangladesh was that the groups were too big and consisted of people with varied economic backgrounds.
[2]An early pioneer of solidarity lending, Dr. Muhammad Yunus of Grameen Bank in Bangladesh describes the dynamics of lending through solidarity groups this way: ... Group membership not only creates support and protection but also smooths out the erratic behavior patterns of individual members, making each borrower more reliable in the process.
A recent survey of the empirical research concludes that the search for alternative approaches must continue, and highlights problems such as "borrowers growing frustrated at the cost of attending regular meetings, loan officers refusing to sanction good borrowers who happen to be in 'bad' groups, and constraints imposed by the diverging ambitions of group members.
[9] The solidarity lending approach, which excludes less-poor borrowers, was adopted in large part because of a view that the more inclusive cooperative 'bond of association' had failed in Bangladesh (see the Comilla Model).
A loan 'strike', if it gains the sympathy of a large number of borrowers, can lead to a rapid and highly unstabilizing escalation in delinquencies.
[11] The photo above – of a group of women seated in rows on the ground before a male NGO-officer who sits in a chair processing their payments – encapsulates another common critique.
