• Microfinance: group or individual lending?

    While reading some papers in this literature (I am thinking for example of some recent contributions by Dean Karlan and Jonathan Zinman, like this 2011 Science paper) may make the non-specialist reader think group lending is going out of fashion, the jury still seems to be out on whether the evidence supports group or individual lending.

    This Voxeu columns by Orazio Attanasio, Britta Augsburg, Ralph De Haas, Emla Fitzsimons, and Heike Harmgart provides new evidence. The interesting thing is that the experiment was conducted in Mongolia, a country which characteristics are actually quite unfavorable to group lending:

    “Mongolia is the most sparsely populated country in the world, and this makes disbursing, monitoring, and collecting small loans very costly. The aim of our experiment, conducted in cooperation with Mongolia’s XacBank, was to analyse whether group lending can be an effective and efficient way to lend. Mongolian microcredit has traditionally been provided as individual loans, reflecting concerns that the nomadic lifestyle of indigenous Mongolians had impeded the build up of social capital.”

    Still, some group lending outcomes seem to dominate:

    “We also find important differences between the impact of group and individual loans, which suggest that the former were more effective. For group loans, we find a positive impact on female entrepreneurship, one of the main intermediate objectives of the programmes. This is largely driven by less-educated women who, at the end of the experiment, had a 29% higher chance of operating a business compared to similar women in control villages. This difference is 10% for highly-educated women. Enterprise profits increase over time as well.”

    Now, Mongolia being an adverse setting for group lending may mean that this is a lower bound on the potential effect of such group mechanisms, or on the contrary that creating social capital through these institutional arrangements is actually more valuable where it is lacking the most.

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