MICROCAPITAL.ORG PAPER WRAP-UP: Group versus Individual Liability: Long Term Evidence from Philippine Microcredit Lending, Xavier Giné and Dean Karlan

Written by Xavier Giné and Dean Karlan published May 2009 as a cooperative effort by Financial Access Initiative and Innovations for Poverty Action, 37 pages, available at:
http://financialaccess.org/sites/default/files/GroupversusIndividualLend…
and
http://poverty-action.org/sites/default/files/GroupversusIndividualLendi…

This study, which took place in Caraga, Philippines, used two separate experiments to perform a comparative analysis of the respective merits of a group-liability lending scheme in contrast to an individual-liability one. A group-liability scheme is thought to be a “collateral replacement” in that members put social pressure on each other and even help each other repay if necessary for the reason that no one in the group can receive further loans from the bank if even one person defaults. An individual-liability scheme has no such mechanism, thus making people without collateral, like those in this experiment, seem like credit risks.

In the first experiment, half of Green Bank’s (a microfinance bank based in Caraga) 161 group-liability branches were, in several waves, converted into individual-liability branches. In the second experiment, 8 branches were opened in new areas and randomly assigned to give either group-liability loans, individual-liability loans, or to start with group-liability and “phase-in” to individual-liability after the successful completion of one loan. All starting loans were between US 18 and US 90, the interest rate was 2.5 percent per month, there were between eight and twenty-five weeks given to repay the loan, and incremental payments were made on a weekly basis.

The main result was that, after three years, there was no significant change in repayment rates between those under group and individual-liability, respectively. In the first experiment, this includes those who were clients before the experiment started, new clients who came before conversion to individual liability, and new clients who came after conversion. The results are similar in the second experiment. There is almost no difference in repayment rates between those under group-liability, those under individual-liability, and those who began under group-liability and were phased-in to individual-liability. This is, of course contrary to the idea that collateral or alternative collateral is needed to maintain a high repayment rate, and the idea that group-liability schemes necessarily attract less “risky” clients than individual liability schemes.

Part of these results might be explained by the fact that all individual-liability payments were still made at a specific time as a group, and some social pressure to make payments must have been applied because of this. It would then make sense that those with “weaker social networks” prior to conversion of centers to individual-liability were more likely to default after conversion, as was the case in this study. The unchanged repayment rates in the “phased-in” group in the second experiment could be explained by the fact that an extra 90 minutes per week was spent by loan officers on “repayment activities” with this group. This could be a cost that blurs the positive results in terms of repayment rates. Lastly, although this study did not concentrate on profitability, the authors make it clear that the results are ambiguous as far as what outcomes would lead to more profitable banks. For example, although repayment rates remained high and client growth was higher for centers that were converted to individual-liability, savings and loan sizes were reduced, which are factors that would hurt bank profitability.

Note: Microcapital touched on group and individual liability in these articles:

https://www.microcapital.org/microfinance-paper-wrap-up-microfinance-stil…

https://www.microcapital.org/paper-wrap-up-loan-officers-and-loan-%E2%80%…

By Christopher Maggio, Research Assistant

Financial Access Initiative: http://www.financialaccess.org/
Innovations for Poverty Action: http://poverty-action.org/
Green Bank: http://www.greenbank.com.ph/images/events.htm
Green Bank on the MIX Market, the microfinance information clearinghouse: http://www.mixmarket.org/mfi/green-bank
Microfinance Council of the Philippines: http://www.microfinancecouncil.org/

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