AN EXERCISE IN WORLDMAKING 2009 - ISS

9 Tailoring Credit Programs along the Logic of the Poor 103
GROUP LENDING: LACK OF KNOWLEDGE AND TRUST
Copestake, Bhalotra and Johnson (2001) discuss a Zambian case study to
demonstrate how inflexible enforcement in group lending has resulted in
some borrowers becoming worse off after taking out a loan. PULSE
(Peri-Urban Lusaka Small Enterprise Project) is a group-based microcredit
program providing loans to low-income neighborhoods in Lusaka,
Zambia. Qualified loan applicants were formed into groups of 25 to 35,
called gulus, and attended weekly training sessions for two months at
their own cost.
The program was launched in 1994 by the NGO CARE-Zambia supported
by the UK Department for International Development (DFID).
The agreement was that after five years, PULSE would be financially
self-sufficient, with a minimum of 10,000 active clients from target cities
of Zambia’s ‘economically active poor’. In June 1998, the program generated
GBP 100,000 in savings (Loan Insurance Fund, or LIF), had provided
loans to 4,235 clients and had 2,640 active participants (63 percent
of which were women). On-time repayment was reported at 79 percent,
and overall repayment was nearly 100 percent.
The group approach was intended for guaranteeing repayment by offering
group collateral: future credit, personal assets and LIF payments.
Members resented being obliged to cover for the debts of others in order
to access loans themselves, and appealed to PULSE to supply loans
to individuals instead. Given the lack of previous knowledge and trust
among members, the group approach did not sufficiently reduce costs in
screening, monitoring and enforcement as planned. These costs were
transferred from PULSE to the clients, which the authors interpret as a
failure to screen out non-creditworthy clients. This may also be linked to
inflexible group enforcement and fixed loan repayments without considering
irregular income due to ill health, theft, job loss and fluctuating
demand.
On a positive note, some members said they benefited from the entrepreneurial
experience of others in the gulu through advice when they
encountered challenges. Some cited instances of gulu members helping
each other by mobilizing funds during illness or for funeral expenses.
These positive experiences are reflected elsewhere. A study of seven urban
poverty reduction programs (in Argentina, Brazil, India, Nicaragua,
Pakistan, South Africa and Thailand) emphasizes the role of credit not