The Self Help Group Model

During our visit to Indian NGOs we've been exposed to different models of delivering microfinance as a way to facilitate women's empowerment. At Chaitanya and Development Support Team (DST) they use the Self Help Group (SHG) model. In this post I want to tell you about SHGs and why it works.

The groups comprise of 10-20 women who decide they want to take part in the program. The groups are economically homogeneous which means all the women know each other, live in the same area and have the same economic and social standing. The whole SHG concept rests on two important factors that make the SHG model successful: mutual trust and peer pressure.

In the beginning, NGOs go into communities to recruit members of the SHGs. It can be a slow and tedious process because women are hesitant at first. The NGOs we've visited are well established and the SHG program has spread like wildfire. Now when informational meetings are held, 100 women show up.

NGOs support the SHGs with training in financial literacy, accounting and the principles of credit. However, the groups are governed by the women themselves. Financial transactions, rules, loan approvals, disbursements, collections and delinquency measures are all decided upon and carried out by the group.

For the first six months, members of a newly-formed SHG save a predetermined amount every month. The amount is consistent with the economic capabilities of the members, anywhere from 20-50 Rupees/month (50 cents - 1 dollar). Each woman has a personal passbook in which her savings are recorded. After the six month period, the SHG group is linked to a bank by opening an account in the group's name and the members of the group may begin to borrow from their joint account.

The bank linkage is an integral part of the process and I think is one of the strengths of SHGs in the Indian context. Indian banks have nationally recognized the SHG movement and allow SHGs to register for bank accounts under special circumstances such as lower required amounts to open the accounts. Indian banks have even gone so far as to publish a manual teaching women how to form an SHG and open a bank account. The use of existing institutions speaks to the sustainability and effectiveness of the SHG model. The NGOs are not inventing their own banks or creating new institutions - they are teaching people to use existing services. I like to judge a development effort by thinking about whether it can sustain itself and exist if the NGO were to disappear. In this case, the answer is yes. If DST were to suddenly implode or cease to exist, the SHGs and microcredit will still exist because the women are completely in control of the process (the women admitted they have set up informal SHG groups of 80 members to increase their credit capacity and loan sizes!). They are not reliant upon the NGOs, they are reliant upon themselves and have the skills and knowledge to continue the SHGs. From a bank's perspective, banks are gaining access to thousands of customers and capital which will undoubtedly mature over time.

50% of the women in DST's SHGs are only savers - they have not taken loans from the group. This demonstrates that women are not only economically empowered by microloans, but they need a safe place to save their money. Even if these women had wanted to save money every now and then, there was no where to put the cash. Under the mattress? In a special jar in the kitchen? Even if the women were able to open a bank account with such a small amount, most women have never been to a bank nor know how to open an account. Most women are illiterate and when it comes to the rural poor - there are no banks for miles around. Access to financial institutions and services was not an option.

For many of the women, making the decision to save without the help or hindrance of their husbands is the first piece of the empowerment process. Making a decision to be part of the group and committing to a save allows the women to make decision in a new domain - the financial domain. Many women have said, "before the SHG I only knew two things: cooking and my children. Now I know about finance and education and many other things." Perhaps most importantly, being part of the group gives the women a new identity. Now they can say, "I am a member of ___ SHG" Previously, women were isolated to their households doing the chores, cooking, cleaning, caring for children...now they have a reason to get out of the house, meet other women and be social.

After 6 months, members of the SHGs are able to apply for loans from their collective savings. With the exception of the interest rates (fixed at 2% per month), everything is decided upon by the group. Loan approval, loan rejection, terms, collection, installments - all of it is collectively discussed and agreed upon by consensus in the monthly SHG meetings. I'll be honest, when I first heard of this model I could see many opportunities for exploitation and I was wary about the group dynamics and the negative influence of peer pressure as they regulated each other.

However, as I've interviewed the women and seen the SHGs in action, I can see it is the underlying cultural context that has allowed this model to flourish in India in a way that would not be possible in the individualistic culture of the US. The women in these groups live in the same slum or rural area. Nothing about their lives is secret and privacy is rare. If someone takes a loan to buy a sewing machine and they use the money for something else - everyone knows! Because of the nature of the group, the women in the SHG are engaging in an informal credit analysis of each person who requests a loan. If she wants a loan to start a vegetable stand, is it likely she will be successful with 6 other vegetable stands in the same area? Has that women been a consistent saver? Are there other loans that should take priority over hers? In the group discussions that accompany a loan request, the women are able to weigh the pros and cons of the loan and decide whether to grant the loan.

If she is granted the loan, the repayment schedule, installments and interest are all calculated by the group and to the next meeting the woman brings 1) the compulsory savings, 2) the first installment of her loan repayment and 3) the interest owed on the loan.

The interest and savings are what allows the capital of the group to grow, and over time the group is able to give larger loans to meet the credit needs. The interest is essentially the profit gained and there are various examples of ways the women choose to use or distribute the rewards to the group members. One group decided that every five years, they would withdraw all of the interest paid and distribute it evenly among each member. Another group who has been together for eleven years uses the interest every five years to treat themselves and their husbands to a mini-vacation. Other groups just continue to accumulate the interest to increase the lending capital of their groups.

Regardless of how it's spent, the interest allows groups to be self-sustaining and shows the women how money invested can grow over time. As groups become more mature they have the capacity to cover their own administrative costs through efficiency and awareness of their financial performance. DST teaches their groups to calculate basic financial ratios and performance indicators such as repayment rates on both the individual and group level. DST now expects new SHG groups to be self-sustaining within three years.

The SHGs have really taken to the idea of financial performance in their groups and the women take great pride in their repayment rates. DST branch offices display the performance of each SHG and at annual meetings high performing SHGs are congratulated. Every member in the mature groups are aware of their financial performance and how it affects the ability of the group to loan money and collect interest.

The SHG model works because the women own the group and are personally invested in the outcomes. If a woman fails to repay the loan as scheduled, the groups usually follow these steps:

1) First, the members of the SHG will talk to her at the SHG meeting.
2) Then, the members will visit her house to exert their peer pressure.
3) As a last resort, the SHG leaders or DST staff will visit her to confiscate something from her home to hold as hostage until she repays the loan.

It rarely progresses to step three - in the thousands of women who are served by these three NGOs, there was only 1 case where goods were confiscated. Interestingly enough, that person was Avida, whose story I told to you earlier. She defaulted on a loan and after her motorcycle was confiscated she resumed payment on the loan (and quickly regained possession of her motorcycle). Since that misstep she has never defaulted on a payment.

Both the NGO staff and the women say that it rarely reaches the third level because peer pressure is enough to spur repayment. There have been cases, however, where loan payments or schedules had to be restructured due to accidents or illnesses. Because of the peer pressure and group consensus decision making, loans are never given to someone who just simply won't pay. The system is set up to mitigate the risks of lending to risky borrowers because all of the members are personally invested and participate in the loan approval process. They will not risk giving their own money to someone who may not be able to repay it. The checks and balances are built in.

The culture of dialogue and lack of privacy also lends itself to this effective group dynamic. What we Westerners regard as 'private' or 'off-limits' topics such as household income is all discussed in the SHG meetings. Everyone knows how much she makes at her vegetable stands, how much debt she carriers, how many children she has, whether her husband works, how much he makes, whether he beats her... Everyone knows! And therefore the group makes a well-informed decision based on factors a loan officer could never hope to capture in a loan application.

Why do SHGs focus on women? Women that have access to credit invest it in their families and households. Men in these communities do work, but they use the money they earn for their own entertainment. When women need something for the household or need to take care of a sick child, they have no resources to do so. With the SHG capital, women are lifting up their entire family: educating their sons and daughters, investing in their households and healthcare. This is why women are the target for microfinance. Because of their traditional roles of taking care of the households and children, when given credit, they invest it in those areas, making a difference for future generations.

As a result of new economic power, men develop a new respect for their wives. One may speculate there is a potential for men to get jealous or resist the participation of their wives in SHGs. One NGO worker put it perfectly: the women are not challenging the traditional male domains by joining the SHGs, they are creating a domain or space for themselves. Once men recognize the benefit that it brings to their families, it becomes a win-win situation for all involved.

The women are granted the 'approval' needed from their husbands to attend the meetings because it benefits the family economically, but what they take from the group is confidence and social capital. When you get a group of women together they talk. They talk about their own lives, the lives of others, and they talk about issues they are having. The SHGs are a forum where they can voice their opinions and solve problems in the community and at home. Savings and credit is the tool that brings the women together but creating social support structures is the end outcome. I have heard countless stories of SHGs that decide to take up a cause in their community. As a group, the women:

- marched against the state minister of sanitation and demanded regular garbage pick up in their slum.
- reported a rape case against one of their daughters...the man was sentenced to 4 years in prison.
- went to the house of a man who was beating his wife, and they beat him with their flip flops and publicly shamed him. He hasn't laid a finger on her since then.

Women as individuals in India's patriarchal society do not have the power to express their opinions or even report a crime - but 20 women banded together are a strong, unified voice and an unstoppable force.

Swine Flu!

The last few days have been a bit frustrating because a lot of our plans have been canceled due to Swine Flu. Just before we came to Pune there were a few cases of it and now Pune has been declared the 'epi center' of swine flu in India!

Not to worry, though. We are all safe and are being well taken care of.

August 15th was independence day and August 14th was the Krishna Festival...due to swine flu in this state, all the celebrations were canceled. Malls, movie theaters, restaurants and internet cafes are all closed (except of course the one I'm sitting at right now...). We're all going a little stir-crazy in our hotel rooms, but luckily we are still on track to do the last two NGO visits of our trip.

For Independence Day we were supposed to go to a village and participate in the festivities, but because of the danger of large gatherings and the stigma of foreigners bringing swine flu into the country, our in-country coordinator decided it wouldn't be wise if we imposed on the village. Yes, it's true that people are scared of us! Apparently the first case came from a guy who had been in the US, so when we pass people they bring their masks up to their faces just in case. It's not so bad in the city of Pune, but a few days ago in the rural area people were really cautious of us.

Instead of going to the village we went to a lake in the countryside and an Aryuvedic Health Center! It was so awesome, we ate a delicious lunch looking over an amazing view of the lake and valley below and then got a hot oil full body massage. Let me tell you, they weren't lying when they say 'full body' massage! There were a few times I couldn't keep from giggling because it was so awkward.

Overall it was a good day, but the swine flu thing still lingers in the background...until the 18th of August we're supposed to lay low. This is the first internet I've had in a few days...who knows when the next one will be. Take care!

What about the banks?

"As for microfinance, I have a question. As microfinance becomes more recognized as a profitable tool, are larger international banks becoming attracted to the field? I know the IMF and World Bank have become more involved in it. As these larger, establishment type entities move into the field, are they putting the squeeze on the smaller NGOs, charging lower interest for larger loans and such? My biggest worry is that the bigger banks will take over the field and the philanthropic part of microfinance will be lost. I just don't see Bank of America giving a crap about empowering people but they have big money muscle."

Thanks, Joe, for giving me a perfect segue into a fascinating topic! This is the one of the main issues these NGOs are dealing with right now and as microfinance continues to prove its sustainability and profitability this issue is at the forefront of everyone's minds! This topic has come up at every NGO we have visited and here's what I've gathered and understand.

First, I want to give a bit of background. Indian Banks have a quota they need to fill to lend to those who may not be considered traditionally "credit worthy." At the end of the fiscal year when they realize the need to meet this quota they send a few representatives out onto the streets, identify a few people, give them loans, and then write it off as bad debts to close the fiscal year. In this way they 'meet' their quotas and unfortunately propogate the notion that the poor are not credit worthy. This story was related by the founder of one of the NGOs we visited, Annapurna. The founder, Medha Samant, worked in the banking sector for three years before starting Annapurna.

So far we've spent time at three NGOs and all three cite the huge gap between the supply and demand for finacial services. As I said before, moneylenders were occupying the space in the market for poor people to get loans. Then, the NGOs came in and began promoting microfinance alongside a series of social programs. Now, microfinance is gaining international attention from investors and corporate banks alike as a way to make a profit.

The problem is that the demand for financial services is so high, that the NGOs who have the right intentions are not able to serve everyone. This leaves the door open for other microfinance insitutions (MFIs) to come in and compete for the business. For-profit MFIs are able to give loans with a one-day turn around with lower interest rates. They are able to give lower interest rates because the loan periods are longer - the maximum loan repayment period we have seen at these NGOs is 2 years. Many Indian NGO microfianance models are based on a Self Help Group model (SHG) that require savings for the first 6 months. When members want to apply for a loan they apply to the group and the entire process may take a couple of weeks, depending on how often the groups meet. (I will write an entry describing the SHG model in detail...). The point is, if people really need money and they can get it the next day, why not use the for-profit MFI?

Members of mature SHGs that have been around for 5-10 years understand the value of the SHG and the benefits they receive from being a part of the group. However, there is nothing to stop members of even mature SHG groups to take a loan from a for-profit MFI during times when they need quick cash, or don't want to go through the group model. The for-profit MFIs are threatening the effectivness and structures of the SHGs and may hinder the ability of NGOs to spread their socially empowering model of microfinance.

Many people I've talked to point out that the for-profit model just doesn't make sense from a business standpoint. The for-profit model focused only on lending neglects the other 'needs' of their customers and does not encourage growth in their customer base and is not a sustainable business model. In fact, there is a shift in NGOs towards evaluating microfinance from social performance perspective in addition to a financial perspective.

The main concern NGOs have about for-profit MFIs is that they are in the market to gain profits, which sets up exploitative models for their clients. The NGO models must be efficient, effective and even self-sustaining, but they are operating with a completely different mission: to better the lives of their clients. I have not visited a for-profit MFI and to be sure, they most likely do not begin under the pretense of exploiting people. But I would argue that regardless of your intentions, if your goal is profit and you are accountable to shareholders who are expecting returns on their investment then this will be reflected in the way business is conducted. The NGOs do recognize these MFIs are providing a service that they are not able to provide, and that indeed they are expanding the scope and reach of credit, but at what cost?

Which brings us to the next part of Joe's question...

"And how are the NGOs funded? Are they more or less sustained by the interest paid on the loans?"

This differs between all of the NGOs we've visited. There are two basic philosophies I've encountered:

1) Sustainable microfinance programs after 3 years.

NGOs are now requiring the Federations (groups of SHGs) to be completely self-sustaining by the end of three years. They recognize that costs of the initial set up, support and development of these groups cannot be burdened on the people. The NGO use funds raised through grants and other international programs to support those groups while they are forming and becoming self sustaining.

DST recently realized the need for groups to be sustainable and now have the SHGs calculate repayment rates of their groups, the individuals and the federations. The women are very cognicent of these financial ratios and concepts and strive to achieve 100% repayment through peer pressure and mutual trust. (Two reasons why the SHG model is so brilliant...will explain in another post).

2) Profits not only sustain the microfinance program, but also fund the growth and development of new projects.

At Annapurna, where the founder comes from a private-sector banking background, they use the profits from the microfinance programs not only to sustain their operations, but also to expand other social programs. I sensed that other NGOs founders do not support this type of expansion funded by profits - they would rather the profits go to the women, or go towards lower interest rates for their loans.

At this point in time, NGOs are being approached by investors and they are having some real internal debates on how to handle this. Of course in an NGO capacity, funding is always an issue, but many are wary of compromising their mission. The only one currently exploring the issue of outside private investors is Annapurna.

Whew! Congratluations if you made it through this very lengthy explanation! This is a very real and complex issue and something the microfinance community is going through. All of my opinions are based on what I've learned here...I'm sure there are more scholarly articles about this topic if you're interested.

Also, there probably won't be any more pictures added to this blog, I'm having some issues with the technology. So sorry!