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Solidarity lending is a lending practice where small groups borrow collectively and group members encourage one another to repay. It is an important building block of microfinance.

Solidarity lending takes place through 'solidarity groups'. These groups are a distinctive banking channel used primarily to deliver microcredit to poor people. Solidarity lending lowers the costs to a financial institution related to assessing, managing and collecting loans, and can eliminate the need for collateral. Since there is a cost associated with each loan delivered, a bank that bundles individual loans together and permits a group to manage individual relationships can realize substantial savings in administrative and management costs.

In many developing countries the legal system offers little, if any support for the property rights of poor people. Laws related to secured transactions - a cornerstone of Western banking - may also be absent or unenforced. Instead, solidarity lending levers various types of social capital like peer pressure, mutual support and a healthy culture of repayment. These characteristics make solidarity lending more useful in rural villages than in urban centers where mobility is greater and social capital is weaker.

Group membership not only creates support and protection but also smooth's out the erratic behavior patterns of individual members, making each borrower more reliable in the process. Subtle and at times not-so-subtle peer pressure keeps each group member in line with the broader objectives of the credit program. . Because the group approves the loan request of each member, the group assumes moral responsibility for the loan. If any member of the group gets into trouble, the group usually comes forward to help.

Solidarity groups are very small, typically involving 5 individuals who are allowed to choose one another but cannot be related. Five is often cited as an ideal size because it is:

» Small enough to ensure a maximum level of joint responsibility and discourage free riders, and
»Large enough to prevent the misfortune or incompetence of one person from causing the group to collapse.

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