Solidarity Lending

= a lending practice where small groups borrow collectively and group members encourage one another to repay. It is an important building block of Microfinance.

Description

From the Wikipedia:

"Solidarity lending takes place through ‘solidarity groups’. These groups are a distinctive banking distribution channel used primarily to deliver microcredit to poor people. Solidarity lending lowers the costs to a financial institution related to assessing, managing and collecting loans, and can eliminate the need for collateral. Since there is a fixed cost associated with each loan delivered, a bank that bundles individual loans together and permits a group to manage individual relationships can realize substantial savings in administrative and management costs.

In many developing countries the legal system offers little, if any support for the property rights of poor people. Laws related to secured transactions – a cornerstone of Western banking – may also be absent or unenforced. 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.

Efforts to replicate solidarity lending in developed countries have generally not succeeded. 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. It concluded that a variety of factors—including difficulties in reaching the target market, the high risk profile of clients, their general distaste for the joint liability requirement, and high overhead costs—made solidarity lending unviable without subsidies. [1] However, debates have continued about whether the required subsidies may be justified as an alternative to other subsidies targeted to the entrepreneurial poor, and VanCity Credit Union, which took over Calmeadow's Vancouver operations, continues to use peer lending." (http://en.wikipedia.org/wiki/Solidarity_lending)