Group Versus Individual Liability: Long Term Evidence from Philippine Microcredit Lending Groups

This brief summarizes the group versus individual liability: long term evidence from Philippines microcredit lending groups for the period 2004-2008. 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.

[1]  J. Adams,et al.  Rural financial markets in developing countries : their use and abuse , 1984 .

[2]  Tomas Sjöström,et al.  Is Grameen Lending Efficient? Repayment Incentives and Insurance in Village Economies , 2004 .

[3]  Prabal Roy Chowdhury Group-lending: Sequential financing, lender monitoring and joint liability , 2005 .

[4]  J. Baland,et al.  Repayment Incentives and the Distribution of Gains from Group Lending , 2011 .

[5]  Attila Ambrus,et al.  Consumption Risk-Sharing in Social Networks , 2010 .

[6]  R. Montgomery Disciplining or protecting the poor? Avoiding the social costs of peer pressure in solidarity group micro-credit schemes , 1995 .

[7]  L. Reed State of the Microcredit Summit Campaign Report 2011 , 2011 .

[8]  María Soledad Martínez Pería The economics of microfinance , 2006 .

[9]  Maitreesh Ghatak,et al.  The economics of lending with joint liability: theory and practice 1 This version: May 1999. 1 , 1999 .

[10]  R. Montgomery Disciplining or protecting the poor? Avoiding the social costs of peer pressure in micro‐credit schemes , 1996 .

[11]  H. Schneider,et al.  Do Social Connections Reduce Moral Hazard? Evidence from the New York City Taxi Industry , 2010 .

[12]  Aminur Rahman Micro-credit Initiatives for Equitable and Sustainable Development: Who Pays? , 1996 .

[13]  A. Greif Cultural Beliefs and the Organization of Society: A Historical and Theoretical Reflection on Collectivist and Individualist Societies , 1994, Journal of Political Economy.

[14]  J. Conning Monitoring by Delegates or by Peers? Joint Liability Loans under Moral Hazard∗ , 2000 .

[15]  G. Fischer Contract Structure, Risk Sharing and Investment Choice , 2011 .

[16]  C. Gollier,et al.  Peer Group Formation in an Adverse Selection Model , 2000 .

[17]  Building Social Capital Through Microfinance , 2010 .

[18]  D. Karlan Is Microfinance Too Rigid ? , 2006 .

[19]  B. Armendáriz,et al.  The Economics of Microfinance , 2006 .

[20]  Maitreesh Ghatak,et al.  Screening by the Company You Keep: Joint Liability Lending and the Peer Selection Effect , 2000 .

[21]  Hal R. Varian,et al.  MONITORING AGENTS WITH OTHER AGENTS , 1989 .

[22]  J. Morduch The microfinance promise , 1999 .

[23]  Dean S. Karlan,et al.  Observing Unobservables: Identifying Information Asymmetries with a Consumer Credit Field Experiment , 2005 .

[24]  J. Stiglitz,et al.  Moral Hazard and Nonmarket Institutions: Dysfunctional Crowding Out or Peer Monitoring? , 1991 .

[25]  Joseph E. Stiglitz,et al.  Peer Monitoring and Credit Markets , 1990 .

[26]  D. W. Adams,et al.  LENDING TO RURAL POOR THROUGH INFORMAL GROUPS: A PROMISING FINANCIAL MARKET INNOVATION? / LE CREDIT DE GROUPE POUR LES COUCHES LES PLUS PAUVRES DES POPULATIONS RURALES: UNE INNOVATION DANS LE MARCHÉ FINANCIER? , 1979 .

[27]  Dean S. Karlan,et al.  Using Experimental Economics to Measure Social Capital and Predict Financial Decisions , 2005 .

[28]  D. Karlan,et al.  Credit Elasticities in Less-Developed Economies: Implications for Microfinance , 2007 .

[29]  J. Laffont,et al.  Group Lending with Adverse Selection , 2000 .

[30]  M. Woolcock Learning from failures in microfinance : What unsuccessful cases tell us about how group-based programs work , 1999 .

[31]  Maitreesh Ghatak,et al.  Group lending, local information and peer selection , 1999 .

[32]  Alessandra Cassar,et al.  The Effect of Social Capital on Group Loan Repayment: Evidence from Field Experiments , 2007 .

[33]  Bernd Irlenbusch,et al.  Group Size and Social Ties in Microfinance Institutions , 2006 .

[34]  Stephen Coate,et al.  Group lending, repayment incentives and social collateral , 1995 .

[35]  J. Conning Monitoring by Peers or by Delegates? Joint Liability Loans under Moral Hazard , 2000 .

[36]  O. Attanasio,et al.  Credit Constraints in the Market for Consumer Durables: Evidence from Micro Data on Car Loans , 2000 .

[37]  R. Townsend,et al.  Using Repayment Data to Test Across Models of Joint Liability Lending , 2007 .

[38]  J. Laffont,et al.  Group Lending with Adverse Selection , 2000 .