Individual vs. group micro-lending

Muhammad Yunus, Nobel Peace Prize winner in 2006, showed the world that it is possible to loan to the poor without requiring collateral and achieve repayment rates close to 100%. He is known for having implemented the Grameen Bank in Bangladesh which now serves 7.4 million poor borrowers and has lent out $6.38 billion.

Nicholas Kristof in the New York Times, the columnist talks about how many in our generation are mobilizing change by becoming social entrepreneurs. He explains this concept by referencing Bill Drayton, the chief executive of an organization called Ashoka that supports social entrepreneurs. Drayton says: such people neither hand out fish nor teach people to fish; their aim is to revolutionize the fishing industry.

Micro-lending meeting. Through OSI's micro-lending project, we are attempting to take the concept of lending to the poor a step further. Yunus has proven that it is not a money-losing endeavor to give money to the poor. He finds that because the poor value so much having access to a loan, they are more than eager to repay that loan in the promise of receiving subsequent larger loans.

Most of the micro-lending models provide group loans to the poor. This means that the poor either create their own group of borrowers or are selected into a group. They then become responsible for each other's loans. If one person in the group of borrowers does not repay the loan, then the entire group loses the opportunity to obtain any future loans. Since the lending organization does not require collateral or past credit history (which are not realistic business practices for poor countries), they rely instead on group pressure to ensure the repayment of loans.

This approach has two problems:

1) if borrowers can create their own lending groups, they will want to be in groups with people who are similar to them. This means they will not want to have someone who is extremely innovative and has risky investment ideas because the return to the investment may not materialize and the entire group will be penalized from receiving future loans.

2) Individuals who are social outcasts for one reason or another (being from a lower caste, a different religion, or being illiterate) will not have the social connections to be able to form these groups. They will be seen as being more risky to include in one's group and, for this reason, will be excluded.

The first problem means that very innovative ideas will not be financed and the community will lose the opportunity to benefit from what could have been profitable and beneficial investments.
The second problem means that the micro-finance organization is not realizing one of its main goals: making credit available to the poorest.

For these two reasons, OSI is implementing an experiment to test whether giving out loans under the group structure versus the individual structure yields very different outcomes. So far, it does not seem that there is a significant difference in repayment rates. While the size of the intervention is too small to provide meaningful conclusions yet, it is a step towards assessing whether the existing mechanism for making credit available to the poor is suitable for the goals it is meant to achieve.

In other words, OSI is testing how to revamp the fishing industry, I mean the micro-credit industry.