Innovating or undermining the group liability model?

Even as the world hails joint liability group model as a simple yet effective tool to combat information asymmetry problems, several instances of MFI’s collecting “savings” compulsorily from their clients are coming to light. The rationale given by NGOs (apparently, there are quite a few who follow this practice) is that the poor do not have avenues for saving nor the ability. By taking compulsory savings they help clients, even though it is illegal for NGOs to take public deposits. In reality, and this is substantiated by some people who are clients of various MFIs, these savings are used as collateral. When a client is unable to make repayments, the MFI makes good the amount from the savings.

This is typical of MFIs that have evolved from or are extensions of NGOs. NGOs typically operate on a grants-basis and communities that have been recipients of such aid find it difficult to differentiate the operations of a grants-based organisation from those of a commercial one. Many organisations offer microfinance services through an MFI arm while the rest of the organisation remains not-for-profit and collects collateral in the guise of savings, membership fees, etc.

The hype surrounding microfinance has made the sector attractive to all sorts of NGOs,particularly those not in the microfinance sector, and the absence of regulation or clarity of legal forms has allowed NGOs to assume several functional forms, often with conflicting interests and missions. There has also been some anecdotal evidence of groups functioning on the basis of collateral even as MFIs do not, raising potential quesitons on the efficacy of self-enforcing mechanisms and group-liability.