nep-mfd New Economics Papers
on Microfinance
Issue of 2006‒07‒21
one paper chosen by
Ana Ogarrio
Kennedy School, Harvard University

  1. Group versus Individual Liability: A Field Experiment in the Philippines By Xavier Gine; Dean Karlan

  1. By: Xavier Gine (World Bank); Dean Karlan (Economic Growth Center, Yale University)
    Abstract: Group liability is often portrayed as the key innovation that led to the explosion of the microcredit movement, which started with the Grameen Bank in the 1970s and continues on today with hundreds of institutions around the world. Group lending claims to improve repayment rates and lower transaction costs when lending to the poor by providing incentives for peers to screen, monitor and enforce each other’s loans. However, some argue that group liability creates excessive pressure and discourages good clients from borrowing, jeopardizing both growth and sustainability. Therefore, it remains unclear whether group liability improves the lender’s overall profitability and the poor’s access to financial markets. We worked with a bank in the Philippines to conduct a field experiment to examine these issues. We randomly assigned half of the 169 pre-existing group liability “centers” of approximately twenty women to individual-liability centers (treatment) and kept the other half as-is with group liability (control). We find that the conversion to individual liability does not affect the repayment rate, and leads to higher growth in center size by attracting new clients.
    Keywords: Microfinance, group liability, joint liability, social capital, micro-enterprises, informal economies
    JEL: C93 D71 D82 D91 G21 O12 O16 O17
    URL: http://d.repec.org/n?u=RePEc:egc:wpaper:940&r=mfd

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