Why Quality Group Formation is Important to Microfinance?

Many successful micro-finance programs treasure Quality Group Formation.

Group Formations are not there by accidents but they are innate in the systems. Though the trend is gearing towards individual lending approach, groups are still vital in microfinance. I may quote from my notes during one of my trainings about microfinance some few years back (this is still true up to this time, believe me):

A group is a collection of individuals who come together to gain access to credit. Groups are the building blocks of the Grameen Bank Approach. In order to build a GB style program that has strict credit discipline, its building blocks or GROUPS must be strong.

Yes, it is true. It is very easy to quote some ideas from old notes for a post or two. But, I am not sharing you this without a purpose or if I see that this will not help you in the long run while you are doing microfinance as a business. (inside link)

Just take the jest of the above quote. These are people who have common interest, i.e, to gain access to credit. These are people who, perhaps, have common situation, i.e., poor entrepreneurs who want to improve their living condition.

And, if you’ve been with me for some posts, you have probably read my article on Market Segmentation for Microfinance. You want to focus to manageable segment of your market, aren’t you?

If you are still on the process of decision-making, I will tell you bluntly: Focus on few things that you do best. (inside link)

I will continue to draw down from my notes, if you care.

What is a Strong Group?

A Strong Group is a collection of individuals who accept that it is in their self interest to ensure that all members of the group fulfill their obligations.

See. Their acceptance to ensure that all members will fulfill their obligations is the beginning of the group’s credit discipline. But, acceptance is not enough. The group must show the credit discipline over a period of time. In short, give them the chance to prove their creditworthiness. If you want to extend loan, then you have to take the risk.

With your quality group formation system, however, the credit risk is limited. When predefined set of rules and procedures were followed by the members of the group for a period of time, you can say that you have formed a good group.

Importance of Group

  • Group Pressure – within a good group, members are pressured to adhere to the rules and procedures. Member who will then break the rules, may be outcast from the group. With group pressure, payment can be 95%.
  • Group as Collateral – hence, members have common aspiration, i.e., to gain credit access, group’s members are ready to lend a hand to some members who can not meet their obligations for some limited time. The group will ensure at least good payment attitude and adhere to the established credit discipline, otherwise, their access to credit is affected.
  • Additional Motivation – Membership motivation can be one of the difficult works of any Account Officers. Lack of motivation among members can lead to delinquency. Here, the group can help you enhance activities on membership motivation.
  • Easier to Collect – it is easier to meet members while they are grouped. It is easier also to collect from them. Whether you are doing group lending approach or individual lending approach, formation of groups can lessen your operating expenses by five-fold.

Group can operate as a simple, smaller village. You can take care of your village if you divide them into groups.

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How to Build a Successful Microfinance with Limited Outreach

More outreach means more members.

More members means more borrowers.

More borrowers means more profit.

The more the better, the merrier, right?

Nope. It is not always the case.

We are easily trapped racing for more-the growth-as if growth is equivalent to success. Not all growths are beneficial. Some growths are harmful. Be aware.

The title of this article seem contradicts my assertion that doing microfinance business is simple, i.e., serve as many outreach you could manage.

No. It only serves my assertion because I made a qualifying statement: “outreach you could manage.”

More members isn’t always better. More outreach is great but if 90% of them fall in turn-over department, does it really matters? Can you see my point? I would prefer to have slow outreach and few members that will become my lifelong members-borrowers rather than to have thousands of outreach but seeing them flee because I could not manage them well.

Growth is not Bad but…

Manage them well. Keep it Simple, Sam. Do you still remember?

Growth is natural in every business. If you spend some quality time establishing quality relationship, then you’ll grow, err, your business grow. Then, again, relationship-building is the key. It is not the system, the product. It is the relationship you built that guarantees your success.

How Can You Be Successful with Limited Outreach?

Do away with numbers. Forget your multiplication table for awhile. Or, just don’t believe to the Christian Bible’s command of “go and multiply.”

Reserve your energy. You can always summon them later. Keep your business simple, Sam. Simplicity is always the best. Don’t think of any reason to complicate things while you are still grasping everything to make your business a success.

  • Have Less, Do Better – it is always easy to focus if you are doing few things. With focus, you could do any of them incredibly well (if not the best) and make lasting impression. With this, you can now establish a quality relationship. They’ll remember you as the best. I know.
  • Offer Quality Products and Services – Since, you are focused, then you could offer high-value quality products that will dramatically lessen your delivery expenses. (Forget the debate of high operating expenses in microfinance. Just focus and keep it simple.) Who, then, needs to have a thousand outreach to be successful?
  • Hasten Your Relationship – While you are starting with few outreach, you could give them quality time. Personal contact can build relationship beyond surface level. Can you not associate your quality time with your love ones? You love your members, aren’t you?
  • Relationship Builds Your Business – Focus on people and not in numbers. The more you build relationship with, the more people know that you are the best. They will create your business’ growth by referring you to their friends, relatives and peers. You need the best customer service to meet their expectations. Since, you are focused in people and not in numbers, you can give them quality customer services. Your quality products will compliment their needs and they will surely recommend these services to people your products fit. How is that?
  • Be Accessible – If you are doing the 4 ways to become successful mentioned above, then you have plenty of time to spare. Filters, barriers, walls are not necessary. In a quality relationship, quality time and quality communication matter. Communication bridges relationship. Invest on it. Your members want to talk to you, give them the opportunity. It is the only way to show that you care and really helping them.

The lesser you do, the deeper you go. Focus on depth, not on reach.

Again, KISS it!

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So long…