Center Discussion Paper, Economic Growth Center 970
Group liability in microcredit purports to improve repayment rates through peer screening, monitoring, and enforcement. However, it may create excessive pressure, and discourage reliable clients from borrowing. Two randomized trials tested the overall effect, as well as specific mechanisms. The first removed group liability from pre-existing groups and the second randomly assigned villages to either group or individual liability loans. In both, groups still held weekly meetings. We find no increase in default and larger groups after three years in preexisting areas, and no change in default but fewer groups created after two years in the expansion areas.
microfinance group lending group liability joint liability social capital microenterprises informal economies access to finance