Effectiveness of the group lending approach in microfinance institutions in Uganda: a case of Pride Microfinance Limited

Abstract

Microfinance institutions in Uganda offering group lending services are facing challenges as the performance of the group lending schemes is deteriorating. Several customers have exited the product which has reduced the overall portfolio of the institutions. This has motivated the need to evaluate the effectiveness of the group lending approach in MFIs in Uganda to identify the challenges of the group lending approach and find suitable solutions. The study aimed at achieving objectives of: evaluate the mechanism of group lending in MFIs in Uganda; examine the challenges of the group lending approach in MFIs in Uganda; and identify strategies for improving the group lending approach in MFIs in Uganda. The study used a cross sectional research design along with both qualitative and quantitative research approaches. A sample size of 351 group clients was selected by convenience sampling from 3604 group clients to respond using questionnaires. Purposive sampling was also used to select; 3 group lending Credit Officers, 3 group leaders and one credit supervisor were for the interviews. Primary data was obtained using a structured questionnaire as well as an interview guide to build a holistic view of the concepts as well as give clarity on areas that might not have come out clearly using the questionnaire. Field results were edited and excel spread sheets were used for analysis. The study interpreted findings using descriptive statistics of frequency and percentages. The study revealed that group lending approach is operated based on certain mechanisms which include; peer selection, joint liability, peer monitoring, dynamic incentives, weekly repayment meetings, compulsory savings, collateral substitutes, social programs and training as well as the fact that it targets women. These mechanisms had their shortcomings which may have led to the attrition of some clients and these include: paying loan instalments for defaulting members; high interest rates; excessive group pressure to make loan repayments; time consuming weekly repayment meetings; poor customer care; non-participation of staff in recovery, interference in the group formation; absence of grace periods; lengthy loan disbursement processes; inadequate loan amounts. Nonetheless, the group leaders and staff highlighted strategies that could be employed to improve the group lending approach which included; reduction of interest rates, introduction of grace periods across all loan level regardless of the amounts, individual liability as opposed to joint liability, staff involvement in loan recovery, improved customer service through reduced loan disbursement period and avoiding shaming in the weekly repayment meetings and increased loan amount. The recommendations included: individual liability as opposed to joint liability; reduced interest rates but as a performance-based incentive; introduction of grace periods across all the group members; emphasis of peer selection; regular and needs focused training; technological leverage especially for reduced turnaround time for loan disbursement and peer monitoring.