Group Lending Programs Research Articles

An Assessment of Group Lending Challenges Facing Microfinance Institutions in Mwanza, Tanzania

The purpose of this study is to thoroughly evaluate the difficulties Tanzanian microfinance institutions (MFIs) encountered when putting group lending concepts into practice. It specifically aims to pinpoint the main obstacles associated with trust concerns, group dynamics, operational complexity, and legal limitations. The study uses a mixed-methods research methodology to collect data from borrowers and MFI staff through qualitative interviews and quantitative surveys. While semi-structured interviews were held with MFIs, surveys were given to clients taking part in group lending programs. For context and historical patterns, secondary data were also gathered from previously published studies, scholarly works, and regulatory papers. According to the study, trust and group dynamics are crucial to the success of group lending initiatives. There are issues with resolving conflicts, free rider issues, uneven participation, and eroding confidence. MFIs emphasized operational problems, such as the difficulty of complying with regulations, technological constraints, and the complexity of handling repayments. Capacity building, technological advancements, regulatory authority collaboration, risk management, and a client-centered approach are among the recommendations. The study admits its shortcomings, including the fact that it only focused on two MFIs in Mwanza and that survey results may have been biased. The results, however, lay the groundwork for future studies on the changing opportunities and difficulties in group lending and give useful insights for practitioners and policymakers in Tanzania’s microfinance industry. This study fills a clear vacuum in the literature by offering a comprehensive analysis of the difficulties MFIs in Tanzania encountered when implementing group lending models. The study’s uniqueness and practical worth are enhanced by the inclusion of theoretical frameworks, a mixed-methods approach, and practical recommendations. As such, it is a great resource for those involved in the microfinance and financial inclusion scene.

Impact of Monitoring Activities and Social Ties on the Repayment Problems of group-Based Lending-Evidence from Vietnam

This study examines how monitoring activities by group leaders and social ties within groups influence repayment rates in the Vietnam Bank for Social Policy’s group lending program in the Mekong Delta. Data used in this paper was obtained from a survey of 675 members from lending groups in 5 provinces in the Mekong Delta in September 2022. The analysis finds a negative relationship between the leader’s social ties and repayment rates, implying that strong social ties might hinder enforcement. However, the impact of leader monitoring, member-level monitoring, and social ties was not statistically significant. Interestingly, group characteristics like size and regulations may play a more significant role in reducing repayment problems.

Group Lending Models As An Alternative Empowerment Model: Assessing Gendered Socio-Economic Impacts in the Global South

Grameen Banks and other microcredit banks specialised towards collective empowerment in rural Bangladesh. The research reviews case studies alongside open-source data on group lending initiatives and models data on creditworthiness, upward mobility, and financial security of women in Bangladesh to examine the potential for the Grameen Bank’s replication for other marginalised economic groups in countries in the Global South, including India, Pakistan, and Sri Lanka. The study aims to identify successes and failures in building community solidarity, the extent of women’s exclusion from other formal credit institutions, and the psychological well-being of female borrowers. It explores the long-term sustainability of group lending programs in specific Global South economic contexts (with widening income gaps across class and gender divides, and growing polarisation) and assesses their broader economic impacts on community development and growth in the identified countries. The study revealed that high repayment rates and the social dynamics of group lending with female borrowers translate into a sustainable and profitable model for lenders, as well as being an alternative system of empowerment benefiting both borrowers and lenders. The paper will analyse the impact of microfinance in developing economies. How far has this concept enabled women’s empowerment in Bangladesh? Has this resulted in encouraging adequate skills for women in other marginalized sections of these economies? What are the models on which this concept works? How effectively have these been used in other developing economies like Pakistan, Shri Lanka and India? Has the model changed in the country in which this model originated? What are the advantages and disadvantages of this system of microfinancing? These and other similar questions will be addressed in the course of this paper.

Competitive Loan-Groups and Economic Achievements of Microcredit Loan Users in a Group-Lending Program: Estimating the Impacts of a Self-Selected Loan Group on the Household Income of its Members Evidence from India

This study sheds light on self-selected loan groups formed under a microcredit group-lending program and estimates how and the extent to which post-determined group-related factors reflecting the group atmosphere and rivalry among the group members affect the economic achievements of the loan users. Based on data from Maharashtra State, India, this study finds that social homogeneity and monitoring among members work as building blocks to increase the household income of a loan user, while fairness and frequent meetings with other members work as stumbling blocks. The likelihood of increasing the household income is higher if a member joins a competitive loan-group in which socially homogenous members gather (fostering rivalry) and monitor each other but concentrate on their own business, meet less frequently, and are not granted equal treatment. These results suggest that pre-existing conditions are not the only factors responsible for economic success, and the posterior environment surrounding microcredit users also contributes to increasing their household income. In our study, rather than creating a comfortable egalitarian loan-group, the formation of a competitive loan-group can be a posterior factor leading to economic success.

Competitive loan-groups and economic achievements of microcredit loan users in a group-lending program: Estimating the impacts of a self-selected loan group on the household income of its members: Evidence from India

Abstract This study sheds light on self-selected loan groups formed under a microcredit group-lending program and estimates how and the extent to which post-determined group-related factors reflecting the group atmosphere and rivalry among the group members affect the economic achievements of the loan users. Based on data from Maharashtra State, India, this study finds that social homogeneity and monitoring among members work as building blocks to increase the household income of a loan user, while fairness and frequent meetings with other members work as stumbling blocks. The likelihood of increasing household income is higher if a member joins a competitive loan group in which socially homogenous members gather and monitor each other but meet less frequently and are not granted equal treatment. These results suggest that pre-existing conditions are not the only factors responsible for economic success and that the posterior environment surrounding microcredit users also contributes to increasing their household income. In our study, rather than creating a comfortable egalitarian loan group, the formation of a competitive loan group can be a posterior factor leading to economic success.

Relief from usury: Impact of a self-help group lending program in rural India

Provision of low-cost credit to the poor through self-help groups (SHGs) has been embraced as a key poverty-reduction strategy in developing countries, but evidence on the impact of this approach is thin. Using a randomized program rollout over 180 panchayats, we evaluate the impact of a government-led SHG initiative in the Indian state of Bihar. Two years after the start of the program, we find a dramatic increase in SHG membership, borrowing from SHGs, and a corresponding decline in the use of informal credit. Fewer informal lenders are operating in treatment villages, and those who do charge lower interest rates. While these credit market impacts could lead to substantial improvements in economic well-being over time, the short-run impact of the program on such outcomes is modest.

On the complex relationship between different aspects of social capital and group loan repayment

Do all aspects of social capital improve repayment behavior in group lending programs? The group lending literature typically uses one or few measures of social capital in a linear form, and systematically understates the uncertainty of results and model specifications. As a result, many papers conclude that specific measures of social capital do not matter. This paper introduces Bayesian Model Averaging to the group lending literature and simultaneously tests the validity of six different measures of social capital. While the initial analysis suggests that only few measures matter, this result becomes invalid when using model selection criteria and Bayesian Model Averaging while allowing for nonlinearity and interactions between different aspects of social capital. We find geographical proximity, trust, friendship, group homogeneity, and acquaintanceship to be important factors in explaining group repayment with mixed evidence for relatives. Our results suggest that microfinance institutions should target borrowing groups with more social capital.

Strategic group lending for banks

Credit institutions often refuse to lend money to small firms. Usually, this happens because small firms are not able to provide collateral to lenders. Moreover, given the small amount of required loans, the relative cost of full monitoring is too high for lenders. Group lending contracts have been viewed as an effective solution to credit rationing of small firms in both developing and industrialized countries. The aim of this paper is to highlight the potential of group lending contracts in terms of credit risk management. In particular, this paper provides a theoretical explanation of the potential of group lending programs in screening good borrowers from bad ones to reduce the incidence of non-performing-loans (NPL). This paper shows that the success of firms involved in selected group lending programs is due to the fact that co-signature is an effective screening device: more precisely, if lenders make a proper use of co-signature to screen good firms from bad ones, then only firms that are good ex-ante enter group lending contracts. So, the main argument of this paper is that well designed group lending programs induce good firms to become jointly liable, at least partially, with other good firms and discourage other – bad-firms to do the same. Specifically, co-signature is proven to be a screening device only in the case of a perfectly competitive bank sector.

GROUP LENDING WITH HETEROGENEOUS TYPES

This paper proposes and implements a mixture structure to model repayment behavior in group lending with unobserved group heterogeneity. We discuss the model properties and identification and estimate the model using a rich dataset from a group lending program in India. The estimation results support the existence of two different group types: “responsible” and “irresponsible” groups. We find that the effects of the factors driving repayment behavior differ across types. The model also shows a higher predictive performance than standard probabilistic models, particularly in the identification of potential defaulters. We provide evidence supporting the robustness of our estimations. (JEL O16, C35)

Group Lending with Heterogeneous Types

Group lending has been widely adopted in the past thirty years by many microfinance institutions as a means to mitigate information asymmetries when delivering credit to the poor. This paper proposes an empirical method to address the potential omitted variable problem resulting from unobserved group types when modeling the repayment behavior of group members. We estimate the model using a rich dataset from a group lending program in India. The estimation results support our model specification and show the advantages of relying on a type-varying method when analyzing the probability of default of group members.

Determinants of repayment performance of group lending in China

PurposeThe purpose of this paper aims to explore how borrower and group‐level characteristics affect repayment decisions of group borrowers by highlighting the case of rural credit cooperatives (RCCs) in Guizhou province in Southwest China.Design/methodology/approachThe Logit model was applied to test the determinants of repayment performance of RCCs' group lending. The authors used the survey data of 245 farm households in Guizhou province, collected in 2008.FindingsThe empirical results indicate that there is a serious mismatch between joint liability mechanisms and the social and economic conditions in rural China. Mechanisms such as threatening to withhold defaulters' future loans from RCCs failed to work. In addition, higher household incomes also did not improve repayment performance. However, factors such as a higher degree of acquaintanceship in a group, migrant income, and employment in government agencies, positively improved the chances of repayment.Practical implicationsGroup lending is more suitable for poorer areas with few opportunities for migration and limited access to finance. In addition, constructing the trustworthy relationship between micro‐lenders and customers and designing diverse and flexible financial services to meet heterogeneous demands are equally important.Originality/valueThis paper is an attempt to empirically explore the determinants of repayment performance in group lending programs in China. The results provide meaningful policy implications for the government and rural financial institutions.

HOW IMPORTANT ARE ENDOGENOUS PEER EFFECTS IN GROUP LENDING? ESTIMATING A STATIC GAME OF INCOMPLETE INFORMATION

SUMMARYWe quantify the importance of endogenous peer effects in group lending programs by estimating a static game of incomplete information. Endogenous peer effects describe how one's behavior is affected by the behavior of her peers. Using a rich dataset from a group lending program in India, our empirical analysis presents a robust finding of large peer effects. The preferred model suggests that the probability of a member making a full repayment would be 12 percentage points higher if all the fellow members were to make full repayment compared with a scenario in which none of the other members repay in full. We find that peer effects would be overestimated without controlling for unobserved group heterogeneity and that inconsistencies exist in the estimated effects of other variables without modeling peer effects and unobserved heterogeneity. Copyright © 2012 John Wiley & Sons, Ltd.

Dynamic Incentives in Microfinance Group Lending

One of the most essential tools of poverty reduction would be the viable expansion of institutional credit facilities to large sections of the people who neither have adequate collateral nor credit history to secure a loan. In this backdrop, social collateral is popularized through the group lending programs to address the credit market problems. Microfinance through group lending is acting as a screening device; the joint liability mechanism creates incentives for internal monitoring. Hence, it has received a lot of attention from policy makers as well as academicians. It is playing an important role in delivering financial services to the “socially and economically excluded” poor, in general, and women, in particular. The group lending works with various dynamic incentives. One such kind is principle of progressive lending and it plays a vital role in sustaining the groups for the persistent delivery of microfinance services to its members. In progressive lending, a typical borrower receives very small amounts at first, which increases with good repayment conduct or it links new, larger loans to past repayment. This article explores possible theoretical and empirical relationship between progressive lending and its determinants in group lending approach. The primary survey was conducted in 10 villages covering 106 self-help groups and 318 members in Karnataka, India. The empirical results show the progressive lending amount rising up to 698% of the initial loan of the self-help groups.

Teaching Entrepreneurship: Impact of Business Training on Microfinance Clients and Institutions

Can one teach basic entrepreneurship skills, or are they fixed personal characteristics? Most academic and development policy discussions about microentrepreneurs focus on their access to credit, and assume their human capital to be fixed. The self-employed poor rarely have any formal training in business skills. However, a growing number of microfinance organizations are attempting to build the human capital of micro-entrepreneurs in order to improve the livelihood of their clients and help further their mission of poverty alleviation. Using a randomized control trial, we measure the marginal impact of adding business training to a Peruvian group lending program for female microentrepreneurs. Treatment groups received thirty to sixty minute entrepreneurship training sessions during their normal weekly or monthly banking meeting over a period of one to two years. Control groups remained as they were before, meeting at the same frequency but solely for making loan and savings payments. We find that the treatment led to improved business knowledge, practices and revenues. The program also improved repayment and client retention rates for the microfinance institution. Larger effects found for those that expressed less interest in training in a baseline survey. This has important implications for implementing similar market-based interventions with a goal of recovering costs.

Reputation, Trust and the Logic of Group Lending

This paper analyzes the interaction between the success of group lending institutions and the stock of social capital (modeled by the level of trust) in the community where the group lending programs are located. Agents play a finitely repeated “trust game” in parallel with a finitely repeated “microcredit game.” There are two agent types: “regular” and “trustworthy,” and these types are private information. Moral hazard problems are present in both games. The model shows that there are conditions under which the presence of trust as an equilibrium of the trust game can enhance the success of the group lending program. Similarly, there are conditions under which success of the group lending program can enhance the development of trust.

How Important Are Endogenous Peer Effects in Group Lending? Estimating a Static Game of Incomplete Information

We quantify the importance of endogenous peer effects in group lending programs by estimating a static game of incomplete information. Endogenous peer effects describe how one's behavior is affected by the behavior of her peers. Using a rich data set from a group lending program in India, our empirical analysis presents a robust finding of large peer effects. The benchmark model suggests that the probability of a member making a full repayment would be 11 percentage points higher if all the fellow members were to make full repayment compared with a scenario in which none of the other members repay in full. We find that peer effects would be overestimated without controlling for unobserved group heterogeneity and that inconsistencies exist in the estimated effects of other variables without modeling peer effects and unobserved heterogeneity.

Assortative Matching, Adverse Selection, and Group Lending

This note reconsiders a theoretical result asserted to explain the success of group lending programs in LDCs. It has been claimed that if groups are allowed to form themselves, risky and safe borrowers will sort themselves into relatively homogenous groups. This positive assortative matching can be exploited by lenders to solve an adverse selection problem that would otherwise undermine the effectiveness of such lending programs. This note shows that the positive assortative matching result does not necessarily hold if earlier models are extended to incorporate dynamic incentives.

Assortative matching, adverse selection, and group lending

This note reconsiders a theoretical result asserted to explain the success of group lending programs in LDCs. It has been claimed that if groups are allowed to form themselves, risky and safe borrowers will sort themselves into relatively homogenous groups. This “positive assortative matching” can be exploited by lenders to solve an adverse selection problem that would otherwise undermine the effectiveness of such lending programs. I show that the positive assortative matching result does not necessarily hold if earlier models are extended to incorporate dynamic incentives.

Repayment Performance in Group Lending Programs: A Survey

This paper surveys the theoretical and empirical literature on group lending programs in developing countries, with a focus on the determinants of repayment performance. About the Author: Joel M. Guttman is a Senior Fellow at Networks Financial Institute. Guttman is currently serving as an associate professor in the department of economics in Bar-Ilan University. He has also served as a visiting professor at the University of Chicago, Brown University and the Helsinki School of Economics. His research areas include evolution of trust and cooperation, economic growth and conflict (internal and external), public economics, applied game theory, and defense economics. He has published numerous articles in scholarly journals including American Economic Review, Journal of Political Economy, Journal of Public Economics, and Economic Journal. He received his Ph.D. in economics from the University of Chicago.

Rules and Actions: Determinants of Peer Group and Staff Actions in Group-Based Microcredit Programs in the United States

This article examines the variety of program features and their impact on staff and participant behavior in peer group lending programs in the United States. The results show that program rules are consistent with the mission of these programs to enhance the access to business credit by creating opportunities and incentives for peer group members to engage in screening, monitoring, and enforcement functions of loan officers. Both peer groups and program staff performed important functions. Overall, program rules had tangible and intended effects on staff and peer group behavior. Program staff consistently performed as the program structure dictated. Program rules had differential impact on peer group actions. Peer screening appeared to be more random but had positive spillover effect on monitoring and enforcement. Peer monitoring was most responsive to program rules. Active peer enforcement followed peer screening and monitoring. More attention needs to focus on systematically encouraging peer group screening.