Community lending with external capital: evidence from a randomised evaluation in Uganda

Community-based savings groups (SGs) both provide credit to the poor and incentivise repayment by allowing community members to borrow from their neighbours. However, available capital is typically limited by members’ savings. We study an intervention relaxing this constraint by exogenously adding initial capital to SGs. Unlike traditional bank loans, this outside money is paid back with the same timing and formula as the other members of the SG, greatly simplifying the process for the SG. Using a randomised experiment in rural Uganda, we find this increases both loans made to SG members and payouts received by SG members. We fail to find evidence that the intervention compromises the functioning of the SGs. Our analysis fails to identify significant effects on the quantity of savings or on SG functioning as measured by disbandment, defaults or failure to repay loans. Cost–benefit calculations indicate a high social rate of return to the intervention.