Microfinance sector caters to the need of poor people and the loans given by microfinance institutions are unsecured i.e. they are not backed by any security. Poor people utilise this money by setting up some small business to earn their livelihood and for various other purposes. You must be thinking that it is very risky to give loans to poor as if they don’t repay the loan you can’t do anything about it. To concur this challenge microfinance industry has adopted the concept of Joint Liability Group. Though it doesnt solve all the problems but it reduces them to some extent.
In Joint Liability Group, The borrowers make a group among themselves and the microfinance institutions give loan to that group. One person in that group is appointed as leader of the group and each person is resposible for the loan taken by any member of the group. If any one person in the group defaults then other group members will have to pay for that.
This Group concept is helpful because eveyone is being monitored by other people in the group and the borrower utilise his money properly. If any one defaults, other group members will make all possible efforts to take money back and he will not find any place in any group next time. So, he will not be able to take loan in future. This thing motivates the borrowers to maintain discipline while asking for loan and utilising it appropriately.
Though sometimes the groups also defaults however it is uncommon. The joint liability group concept helps the microfinance institutions in reducing the default risk and at the same time inculcate the habit of disciplined management of finance among the poor.
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