How It Works
Formation of Group:
An SHG consists of 10-20 members, typically women from low-income households. These groups are usually formed around trust and mutual cooperation, often within the same community or village.
Savings and Internal Lending:
Group members meet regularly to save a small, fixed amount, which is pooled into a common fund. This fund is used for internal lending to members at an agreed interest rate. This savings-based mechanism is critical for building a financial discipline.
External Credit Linkage
After a certain period, usually six months to a year of saving and lending within the group, the SHG may seek loans from banks or microfinance institutions based on the group’s savings and repayment history.
Self-Management:
Unlike JLG, SHG groups are self-managed, with members themselves deciding on loan terms, interest rates, and repayment schedules. The funds can be used for various purposes, including personal needs, education, healthcare, or small business ventures.
Advantages of SHG Model:
Empowerment:
SHGs, particularly for women, encourage financial independence, social empowerment, and skill development.
Savings-Based:
Since the model relies on pooled savings, there is a reduced reliance on external loans, making the system more sustainable over time.
Flexible Loans:
Members can borrow small amounts according to their needs, and the group can set its own interest rates and repayment terms.
Disadvantages:
Limited Funds Initially: The amount of money available for lending depends on the group’s savings, which may be limited initially.
Group Dependency:
If members fail to save or repay loans, it can affect the entire group’s ability to secure external loans or function properly.
Need for Strong Leadership :
SHGs require effective leadership and cooperation for smooth functioning. Poor leadership can lead to inefficiency or conflict within the group.
Comparison of JLG and SHG Models
| Feature |
JLG Model |
SHG Model |
| Group Size |
4-10 members |
10-20 members |
| Loan Purpose |
Typically income-generating activities |
Personal and business use |
| Collateral |
No collateral; joint liability |
No collateral; savings-based system |
| Loan Responsibility |
Joint liability (entire group is liable) |
Individual and group responsibility |
| Savings Requirement |
Not mandatory |
Mandatory group savings |
| Loan Source |
Primarily from MFIs/banks |
Internal lending and external loans |
| Loan Flexibility |
Structured loans from external sources |
Flexible, based on internal funds |
| Social Empowerment |
Focused on financial inclusion |
Focused on social and financial empowerment, particularly for women |
| Management |
Managed by the lender/MFI |
Self-managed by the group |
How JLG and SHG Models Work in Practice
JLG Model Example: A group of 5 farmers form a JLG to secure a loan of ₹50,000 each from a microfinance institution to invest in farming equipment. Each farmer is responsible not only for their loan but also for the group’s loan. If one farmer defaults, the others are obligated to cover the missed payment. This collective responsibility motivates everyone to make timely repayments.
SHG Model Example:
A group of 15 women from a village forms an SHG, where each member saves ₹100 per month. Over time, their pooled savings grow, and they start giving loans to group members to support small business ventures. After 12 months, the SHG approaches a bank for an external loan of ₹1,00,000 to further expand their businesses. Since the group has demonstrated good saving and repayment discipline, the bank approves the loan.
Conclusion
Both the JLG and SHG models play vital roles in microfinance by enabling underserved communities to access credit. The JLG model focuses on joint liability for income-generating activities, while the SHG model emphasizes savings and self-management, with a broader focus on community welfare. These models have proven successful in providing financial services to those who lack traditional banking access, empowering individuals to improve their livelihoods.