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Group lending or individual lending? Evidence from a randomised field experiment in Mongolia

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Author Info

  • Orazio Attanasio

    () (Institute for Fiscal Studies and University College London)

  • Britta Augsburg

    () (Institute for Fiscal Studies)

  • Ralph de Haas
  • Emla Fitzsimons

    () (Institute for Fiscal Studies)

  • Heike Harmgart

    () (Institute for Fiscal Studies)

Abstract

Although microfinance institutions across the world are moving from group lending towards individual lending, this strategic shift is not substantiated by sufficient empirical evidence on the impact of both types of lending on borrowers. We present such evidence from a randomised field experiment in rural Mongolia. We find a positive impact of access to group loans on food consumption and entrepreneurship. Among households that were offered group loans the likelihood of owning an enterprise increases by ten per cent more than in control villages. Enterprise profits increase over time as well, particularly for the less-educated. For individual lending on the other hand, we detect no significant increase in consumption or enterprise ownership. These results are in line with theories that stress the disciplining effect of group lending: joint liability may deter borrowers from using loans for non-investment purposes. Our results on informal transfers are consistent with this hypothesis. Borrowers in group-lending villages are less likely to make informal transfers to families and friends while borrowers in individual-lending villages are more likely to do so. We find no significant difference in repayment rates between the two lending programs, neither of which entailed weekly repayment meetings.

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Bibliographic Info

Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W11/20.

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Date of creation: Dec 2011
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Handle: RePEc:ifs:ifsewp:11/20

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Keywords: Microcredit; group lending; poverty; access to finance; randomised field experiment;

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References

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  1. Ghatak, Maitreesh & Guinnane, Timothy W., 1999. "The economics of lending with joint liability: theory and practice," Journal of Development Economics, Elsevier, vol. 60(1), pages 195-228, October.
  2. de Mel, Suresh & McKenzie, David & Woodruff, Christopher, 2008. "Are women more credit constrained ? experimental evidence on gender and microenterprise returns," Policy Research Working Paper Series 4746, The World Bank.
  3. Fafchamps, Marcel & McKenzie, David & McKenzie, David & Quinn, Simon & Woodruff, Christopher, 2011. "When is capital enough to get female enterprises growing ? evidence from a randomized experiment in Ghana," Policy Research Working Paper Series 5706, The World Bank.
  4. Karlan, Dean & Gine, Xavier, 2009. "Group versus Individual Liability: Long Term Evidence from Philippine Microcredit Lending Groups," Working Papers 61, Yale University, Department of Economics.
  5. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
  6. Fafchamps, Marcel & McKenzie, David J. & Quinn, Simon & Woodruff, Christopher, 2011. "When is capital enough to get female microenterprises growing? Evidence from a randomized experiment in Ghana," CEPR Discussion Papers 8466, C.E.P.R. Discussion Papers.
  7. Jonathan Morduch, 1998. "Does Microfinance Really Help the Poor? New Evidence from Flagship Programs in Bangladesh," Working Papers 198, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
  8. Xavier Gine & Pamela Jakiela & Dean Karlan & Jonathan Morduch, 2006. "Microfinance games," Framed Field Experiments 00150, The Field Experiments Website.
  9. Joseph P. Kaboski & Robert M. Townsend, 2011. "A Structural Evaluation of a Large‐Scale Quasi‐Experimental Microfinance Initiative," Econometrica, Econometric Society, vol. 79(5), pages 1357-1406, 09.
  10. Bhole, Bharat & Ogden, Sean, 2010. "Group lending and individual lending with strategic default," Journal of Development Economics, Elsevier, vol. 91(2), pages 348-363, March.
  11. Fenella Carpena & Shawn Cole & Jeremy Shapiro & Bilal Zia, 2012. "Liability Structure in Small-Scale Finance: Evidence from a Natural Experiment," Harvard Business School Working Papers 13-018, Harvard Business School.
  12. Guinnane, T. & Banerjee, A. & Besley, T., 1993. "Thy Neighbor's Keeper: the Design of a Credit Cooperative with Theory and a Test," Papers 705, Yale - Economic Growth Center.
  13. Joseph P. Kaboski & Robert M. Townsend, 2005. "Policies and Impact: An Analysis of Village-Level Microfinance Institutions," Journal of the European Economic Association, MIT Press, vol. 3(1), pages 1-50, 03.
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Citations

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Cited by:
  1. Gharad T. Bryan & Dean Karlan & Jonathan Zinman, 2012. "Referrals: Peer Screening and Enforcement in a Consumer Credit Field Experiment," NBER Working Papers 17883, National Bureau of Economic Research, Inc.
  2. Bryan, Gharad & Karlan, Dean S. & Zinman, Jonathan, 2012. "You Can Pick Your Friends, But You Need to Watch Them: Loan Screening and Enforcement in a Referrals Field Experiment," CEPR Discussion Papers 8857, C.E.P.R. Discussion Papers.
  3. Britta Augsburg & Ralph De Haas & Heike Harmgart & Costas Meghir, 2012. "Microfinance at the margin: Experimental evidence from Bosnia and Herzegovina," IFS Working Papers W12/15, Institute for Fiscal Studies.
  4. Ghatak, Maitreesh & de Quidt, Jonathan & Fetzer, Thiemo, 2013. "Market Structure and Borrower Welfare in Micro Finance," CAGE Online Working Paper Series 122, Competitive Advantage in the Global Economy (CAGE).
  5. de Mel, Suresh & McKenzie, David & Woodruff, Christopher, 2012. "Business training and female enterprise start-up, growth, and dynamics : experimental evidence from Sri Lanka," Policy Research Working Paper Series 6145, The World Bank.
  6. Carpena, Fenella & Cole, Shawn & Shapiro, Jeremy & Zia, Bilal, 2010. "Liability structure in small-scale finance : evidence from a natural experimen," Policy Research Working Paper Series 5427, The World Bank.

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