| 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 |