Group Lending or Individual Lending? Evidence from a Randomized Field Experiment in Mongolia

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 10 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 programmes, neither of which entailed weekly repayment meetings.

Attanasio et al (2011)Rural.RCT.Tested opening of MFI branches by assigning group liability loans, Individual loans or having no MFI branch. Group liability and individual credit originally intended for business purposes.11% statistically insignificant increase in total per capita expenditures. Positive impact of both group and individual loans on business profits among women clients in areas with access to credit for longer period of time. Positive impact on likelihood of owning enterprise among HH offered a group loan. Group liability loans had positive impact on HH business creation (no impact of individual credit). Credit had positive impact on women's profits in areas with access to credit for longer period of time. No significant impact on self-employment, wage labor or total earnings. No impact on likelihood of owning enterprise among HH offered individual loans or group liability credit on individual credit.,148 adult women (987 in follow-up) from 40 communities.