Observations about Peer Group Lending in the U.S. Strengths and Weaknesses

Observations are based on primary data collection and review of secondary sources. Primary data sources include Self Employment Learning Project (SELP) In-depth Entrepreneur Longitudinal Survey and Program Profile; SELP Case Studies of the Good Faith Fund, North Carolina Rural Center, Coalition for Women's Economic Development, and Women's Self Employment Project; independent outcome evaluations of two senior peer lending organizations completed in 1997 and 1998; interviews with practitioners; and preliminary data from the MicroTest project. Secondary sources include: "Going Forward: The Peer Lending Exchange" (Calmeadow, 1993); report of Chicago Peer Lending Workshop — 1991; The Practice of Microenterprise in the U.S. (Aspen Institute, 1996) and DevFinance Listserv submissions.

Potential Strengths

• Can provide an effective combination of: goal-setting and reporting; networking; mutual feedback and learning; and consistent, structured attention on members' business challenges and opportunities
• Often provides a start-up business with its first sales and/or marketing contacts — essential for many businesses to launch
• Expands an existing businesses' marketing network
• Group support can be powerful -- reduces isolation and fear for some; helps entrepreneurs overcome stumbling blocks in tough business and/or regulatory environment; increases confidence in self as a business owner; strengthens identity as an entrepreneur
• Increases individual's focus on the business, in part due to the need to remain accountable to group for stated business goals and financial commitments
• Group feedback and brainstorming encourage more viable or more creative business ideas; steer entrepreneurs towards better business decisions
• Potentially, fewer staff are needed to reach more clients
• Transaction costs off-loaded from programs to members
• For some, provides access to learning while avoiding undesirable or intimidating classroom environment
• Some participants perceive that they have learned better in the peer group environment than they would have in individual program
• Improves presentation, sales and marketing skills
• Builds individual's capacity to do business planning, bookkeeping and financial record keeping
• Builds on existing leadership skills for some
• Structure and accountability inherent to the group process forces some to focus on implementation of one, viable business vision
• Building up individual savings or group reserves establishes a foundation of mutual obligation and trust and provides a reason for the group to work as a unit.
• Developing a regular habit of saving supports business identity, goals and abilities and is seen as a long-term benefit in personal affairs
• For some, peer group lending represents opportunity to improve bad credit or build an initial credit history that may enable access to other sources of money
• Builds sense of community and may even create social capital within communities — common for group members to envision and sometimes implement community service activities as a collective
• Group members have stated that they came to realize an increased sense of power within their communities — one that they would not have felt individually, but gained by working as a group
• Status as a group member can legitimize home-based businesses to other family members

Potential Weaknesses

• Significant limitations when used as a vehicle for credit delivery
• Time-consuming and difficult to form groups
• Very difficult to maintain groups over time
• Turnover of members is common, particularly in urban areas
• Driving distance to meetings may hinder rural groups
• Even well-functioning groups lose momentum over time, perhaps due to increasing diversification of individual members' credit and technical assistance needs
• Participants see the increased need to protect the privacy of their personal financial information as inhibiting outreach to new members as well as their ability to make informed loan decisions
• Peer lending is perceived by members as more time-consuming than individual training and lending
• Transaction costs off-loaded from programs to members
• Loan disbursement and terms, guided by program and group structures, are often not flexible enough for microbusinesses to take advantage of market opportunities
• Interpersonal conflicts can ruin established trust and impair group functioning
• Interpersonal problems within groups can include jealousy, dishonesty and a lack of trust. As groups become more personalized, these problems emerge. One peer lending participant noted: "You have to maintain a certain business element at all times...we've run into problems as business and friendship become mixed."
• Having experienced delinquency, defaults, or fraud, programs' requirements become more stringent; centralization of authority demoralizes groups and undermines social capital gains
• Group liability concept competes with U.S. legal and social norms based on individual liability
• Programs respond inconsistently to group defaults — sometimes maintain group liability and sometimes shift to individual liability, sometimes disband old group and other times reconstitute the group
• Changes in policy are realistic given the context in which programs operate, but these changes differ from the ideal communicated to participants during orientations
• Lack of clarity and consistency in policies creates confusion about the programs' expectations of participants and of groups
• Leadership can become a burden for those who take responsibility for group — it can be hard to convince or find another member to take the reins
• Re-forming groups after losing one or more members usually delays planned access to the loan fund and can discourage remaining participants, especially if there is an on-going need to replace lost members
• New members can be a source of stress for groups because they did not go through the original group certification or bylaw creation processes
• Members who are unfocused can be a drain on the group
• The training and technical assistance that groups receive when they first enter the program is insufficient to meet the needs and demand of most microentrepreneurs — most participants request on-going access to workshops, one-on-one consulting and outside speakers
• Groups sometimes set up additional conditions for loan eligibility (aside from the program's conditions) which limit access to credit for people trying to overcome past credit histories — for example, it is not uncommon for groups to require credit checks and collateral
• A portion of participants enters or remains in their group for the support and motivation they receive without a firm plan to borrow from the loan fund. This, coupled with a relatively low number of groups per direct-service staff, makes program sustainability almost impossible
• Family members may be distrustful of these new relationships