SHGs vs JLGs

30 Jan 2024 By Shikhar Sharma MFIs & SHGs

Table of Contents:
1. Self-Help Group (SHG)
2. Joint Liability Group (JLG)
3. Difference between JLG and SHG models of Microfinance
4. SHG And JLG: Which model is better?

Group-based lending or solidarity lending is a standard concept in microfinance. Instead of lending to individuals, MFIs typically lend to small groups of people who come together to borrow money and guarantee prompt repayment of the loan. This community strategy has its advantages-more members prefer to come forth to accept a loan if they are part of a larger group.Social pressure therefore means that any member of the party pays back. From the perspective of the lending institution, lending to groups typically proves to be more cost-effective, since the cost of each loan is minimised by lending to groups. Often, there is generally no need for collateral if a loan is given to groups.

The idea of Joint Liability Groups was established with the goal of providing institutional loans to small farmers by NABARD (National Bank for Agriculture and Rural Development). This is in the same trend as the SHG (Self Support Groups) where NABARD offers refinancing facilities to banks to offer loans to small and marginal farmers. JLG schemes have proved to be very popular in North India, especially UP, MP and Haryana.NABARD already has 41 lakh SHGs that are credit-linked


Self-Help Group (SHG)

The Self-Help Group represents a group of 10-20 individuals who share similar socio-economic conditions to different development projects or to fix basic problems. These groups are acknowledged by governments and banks and may open bank accounts on behalf of the SHG. These communities tend to be independent and appear to be active in a variety of events, including social causes.So when a group of fifteen rural women would like to apply for a loan to establish a small business selling bags and pillows, they would be called a SHG. These SHGs, by way of entrepreneurship, help to generate more job possibilities and encourage others to invest in small businesses as well.

● In 1997, READ was the first organisation in its sector to incorporate the idea of women self-help groups, and five women self-help groups were established in the Andimadam Block of the Ariyalur District (in the villages of Periya Krishnapuram, Thanjavoor Anchavai, Vilandai, Vilandai Colony and Keelnaduvai).

Joint Liability Group (JLG)

JLG is typically a group of five to ten individuals who work together to get a loan from MFI. Members of the JLG often come from common socio-economic backgrounds and typically from the same village. The JLG is distinct from the SHGs in that the members share the burden or stand the pledge with each other.If every individual fails, the remaining members need to pool their money to refund the MFI. This means a greater commitment on the part of the members to ensure that everyone pays back, thus ensuring more transparency and protection for the MFI involved. JLG are usually formed by:

● Farmers Associations, Panchayat Raj Institutions (PRIs), Farmers' Clubs, Krishi Vikas Kendras (KVKs), State Agriculture Universities (SAUs), Business Facilitators, NGOs, Agriculture Technology Management Agency (ATMA), Bank branches, PACS, Other Co-operatives, Government Departments, Individuals, Input dealers, MFIs / MFOs etc

Difference between JLG and SHG models of Microfinance

Both SHG and JLG are outlets for the financial empowerment of the vulnerable. These individuals usually lack good collateral, and thus communities are formed through which peer pressure serves as social collateral. In general, members of the community come from the area and support each other and wish to work together to alleviate poverty. There are a variety of variations in the development and functioning of SHGs and JLGs which are as follows:

1. The SHG model is primarily used by banks for lending purposes. NABARD supports the SHG-Bank linkage. While JLG loans are primarily used for MFIs.
2. SHGs have a group size of 10-20 members, while JLGs have a reduced group size of 5-10 members.
3. The SHGs are more formal than the JLG. SHG has roles defined as President, Treasurer, serving as an intermediary between all SHG members and financial institutions. All JLG participants must communicate explicitly with the financial institutions themselves.
4. Members of the SHG shall make daily savings and deposit them with the financial institution. Lending to SHGs is determined by the amount of savings SHG has on the bank account. Generally, the value of the debt is 5 times the amount of the savings. The JLG model is primarily used for lending purposes only irrespective of investments.
5. In the case of SHG loans, not individuals, i.e. community loans, are made on behalf of SHG, while in the case of JLGs loans are made to individual members, while all members are the guarantors of each other. SHG members usually participate in the same task and work together while JLG members spend the loan sum for various reasons.

SHG And JLG: Which model is better?

Both the SHG and JLG have their own set of benefits and drawbacks, based on the perspective they hold on micro-finance. Under the context of the Community-based micro-finance organisation of the SHG-driven model, the goals of micro-finance initiatives go beyond the limited limits of financial service delivery. Microfinance is seen as an effective mechanism for organising the unorganised and motivating women by encouraging them to create their own institutions.The goal is to improve the ability of the poor so that they can access their own financial resources. This is mirrored in the procedure followed the SHG model, in which the bulk of the decisions are made by the members of the community themselves, with substantial emphasis on the capacity building of the members. On the opposite, the JLG paradigm operates mainly on the supply side of the microfinance system, where communities are assumed to be a mere method for loan disbursement, which can be easily repeated.

The SHGs complement the region with a larger number of non-governmental organisations and structured financial agencies and implementation organisations have a strong growth policy that is not limited to microfinance alone. Similarly, JLGs are ideally not for areas with homogeneous and enterprising populations.Quick access to structured financial institutions; companies with a business approach and efficiently operated employees should be adopted;Organizations also follow templates based on their ideological inclination, and availability of financial assistance from either banks or sponsors. Not much attention has been paid to the internal power of companies and geographic characteristics. Organizational culture, leadership and function, and their link to the adopted model and its effect on the success of the MFI, require a more thorough analysis based on additional empirical studies.Similarly, the cause SHGs succeed in some societies and JLGs struggle in others involves a more thorough analytical analysis of external powers. The results of these empirical research would be of considerable benefit to rational decision in microfinance organisations.