Group Versus Individual Microfinance Lending

Group lending was one of the mechanisms that got microfinance off the ground, so we shouldn't dismiss its importance, if only it historical importance. But a new paper by Xavier Gine (World Bank) and Dean S. Karlan (Yale and MIT) takes an interesting look at its impact, using modern randomized trials and all that. The authors find that repayment rates do not vary in their trials between group and individual liability, but that groups are harder to form under the latter regime.

It's worth noting that groups do increase social capital and facilitate new forms of social entrepreneurship because they provide an infrastructure that outside groups can utilize. This can help target an innovation and also lead to a faster and wider diffusion of new technologies. Below is the abstract for the paper, Group versus Individual Liability: Long Term Evidence from Philippine Microcredit Lending Groups.

Group liability in microcredit purports to improve repayment rates through peer screening, monitoring, and enforcement. However, it may create excessive pressure, and discourage reliable clients from borrowing. Two randomized trials tested the overall effect, as well as specific mechanisms. The first removed group liability from pre-existing groups and the second randomly assigned villages to either group or individual liability loans. In both, groups still held weekly meetings. We find no increase in default and larger groups after three years in pre-existing areas, and no change in default but fewer groups created after two years in the expansion areas.