Credit firms use social link to help poor access loans

Lending to the low income groups is always a brave bet as their chances of servicing the loans is never guaranteed.

But a credit firm has found a way to help low income earners guarantee one another when applying for loans— turning out to be one of the safest ways of ensuring that loan is repaid.

Women Enterprise Solutions (WESO), a credit company, uses the concept of social solidarity, made famous by Nobel laureate Muhammad Yunus of Grameen Bank— to help poor people access credit.

“We have two groups that we focus on: poor and very poor women. They have no substantial collateral,” said Mrs Juster Weru, CEO of WESO.

Other institutions offering credit to organised groups include the Kenya Women Finance Trust, a microfinance firm that also focuses on women.

Mrs Weru says that the women are asked to form groups of five or more.

An individual seeking a loan saves within the group for six weeks after which she can access up to six times the value of her savings.

Most of the loans advanced are for business, though personal needs like school fees may also be financed.

The groups are self-monitoring and members countersign loan forms with a loanee, guaranteeing to pay in case the loanee defaults.

WESO lends as little as Sh2,000 to individuals that fall under the very poor category.

If a member develops a good credit history by consistently taking and paying back loans, she can be eligible for loans of up to Sh300,000 which is not backed by a group but by assets she will have acquired in her expanding business.

The loans attract an interest rate of 18 per cent.

This is about three per cent higher than the average lending rates by commercial banks which as of August stood at 14.76, according to Central Bank of Kenya statistics.

“Unlike commercial banks that are able to obtain money at lower costs through customer deposits, we source part of our capital from the same banks who lend to us at higher interest rates,” said Mrs Weru, adding that the high cost of capital for small lenders is what causes their relatively high interest rates.

Despite the lower interest rates offered by banks, most small businesses and individuals, barred by lack of collateral or healthy cash flow statements, still access credit through informal groups like shylocks or employers.