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Group versus Individual Liability: A Field Experiment from the Philippines

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. This study worked with a bank in the Philippines to conduct a field experiment to examine these issues. The study 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).

Although the study finds evidence of the oversight mechanisms that group lending is supposed to create amongst borrowers, it does not find that these mechanisms add up in any meaningful way economically. In fact, it finds that the conversion to individual liability does not affect the repayment rate, and leads to higher growth in center size by attracting new clients.

The paper is organized as follows. Section I contains an introduction to the study. Section II reviews the literature on group versus individual liability lending programs. Section III presents the experimental design and the administrative and survey data collected. Section IV presents the empirical strategy and primary results on the impact of group versus individual lending on centre and individual performance. Then, section V presents results from three surveys conducted one year after the initial conversion in order to learn more about the mechanism through which changes did or did not occur. Section VI concludes. There are also a number of tables and appendices attached to the study which present the data collected.

  • Resource type
  • Author Giné, Xavier; Karlan, Dean
  • Organisation
  • Year of Publication2006
  • Region
  • LanguageEnglish
  • Number of pages39 pp.

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