Collaterals of the villagers

My work at the SACCO gives me the opportunity to review loan agreements made to villagers. Textbooks say that the poor often do not have collaterals and therefore social capital is often used as collateral. In a typical loan agreement, I see the presence of both.
The most common collaterals are:
– land title. Land ownership is not very common in central Uganda as land titles are expensive.
– plot agreement: an agreement between the landlord and the tenant which gives the tenant the right to use the land conditional on an annual fee.
– house
– animals: cows worth the most, then goats, pigs, chickens and ducks.
– motorcycle cards. Motorcycles (boda bodas in Luganda) are valuable assets here.
– plantations
Apart from collateral requirements, the bank also requires two guarantors. The member’s spouse also needs to acknowledge this loan application and to promise he/she will help his/her spouse to pay back the full amount on time. The latter is more likely to be a moral committment though.
The SACCO offers group accounts as well. Many farmer groups have joint accounts at the bank. Each group needs to select three people responsible for the account. All three of them have to be present at any deposit or withdrawal. When the group takes out a loan, the three representatives are responsible for paying it back. Conventional wisdom in microfinance suggests group lending reduces default rates by peer pressure. Although the SACCO is a credit union instead of a microfinance institution, it would be interesting to see whether this group arrangement improves loan repayment.


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