n. A credit arrangement in which a small group of borrowers guarantee each other's loans in lieu of providing collateral.
A large number of U.S. microenterprise programs…have adopted the Grameen Bank's "peer lending group" technique, in which a small number of borrowers (generally four or five) guarantee each other's loans and meet periodically to discuss business strategies and give each other pep talks. Zoila Perez's group, called "El Progreso de Bellas Ilusiones" ("the Progress of Beautiful Dreams"), includes one other clothing vendor, two custom clothing designer/seamstresses and a jewelry business. Each woman used a $ 2,000 loan to buy inventory.
Since the new entrepreneurs often lack collateral, loans often are set up through "peer-lending" groups in which one person receives a loan while others act as "advisers." After the borrower starts repaying the debt, another loan is granted to someone else in the group.
A handful of nonprofits are experimenting with "peer lending" for very small businesses in low-income communities. The technique, which has been successful in the Third World, substitutes peer pressure for collateral. People who need small loans (from several hundred to several thousand dollars) to start or expand businesses form groups of five; the group decides who gets money first-the others get loans only if the first ones are kept current.