Group versus individual liability a field experiment in the philippines
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Group versus Individual Liability: A Field Experiment in the Philippines. Xavier Gin é World Bank. Dean Karlan Yale University Innovations for Poverty Action. Motivation. Microfinance is typically seen as a solution to credit market failures faced by the poor

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Group versus Individual Liability: A Field Experiment in the Philippines

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Group versus individual liability a field experiment in the philippines

Group versus Individual Liability:A Field Experiment in the Philippines

Xavier Giné

World Bank

Dean Karlan

Yale University

Innovations for Poverty Action


Motivation

Motivation

  • Microfinance is typically seen as a solution to credit market failures faced by the poor

  • Group liability, a feature found in many micro loans is perceived as a key innovation that has contributed to this success


Motivation1

Motivation

  • Yet, in recent years, many micro-lenders have expanded rapidly using individual liability

  • In turn, this has motivated other lenders that were using group liability to shift to individual liability


Flexibility versus sustainability

Flexibility versus Sustainability

  • (Perceived) tradeoff for deepening outreach of microfinance

    • Flexibility (to increase demand)

      • Price flexibility

      • Liability flexibility

      • Term flexibility

    • Sustainability

      • Repayment

      • Covering fixed costs (reduce turnover)


Motivation2

Motivation

  • Need for better understanding of relative merits of group versus individual liability lending.

    “The best evidence would come from well-designed, deliberate experiments in which contracts are varied but everything else is kept the same”

    The Economics of Microfinance

    Armendariz de Aghion and Morduch (2005)


Very simple summary

Very Simple Summary

  • What we did was very simple…

  • Took 169 preexisting centers of ~25 clients in a group liability program

  • Randomly chose 80 of them and removed the group liability.

  • All else remained the same.

  • Default did not change and more clients borrowed.


Theory and evidence

Theory and Evidence

  • Literature focuses on repayment, despite being only one aspect of profitability

    • Group lending solves informational asymmetries by shifting the burden from the lender to the clients (Ghatak and Guinnane, 1999)

      • Adverse selection (screening and sorting)

      • Moral hazard (ex-ante and ex-post)

    • It also creates an element of insurance


Theory and evidence1

Theory and Evidence

  • Much less stress on client retention/growth

    • Members may reject close friends for fear of social sanctions

    • Some may be reluctant to borrow if information about other members is not available


Experimental design

Experimental Design

  • Institution: Green Bank of Caraga

    • Rural Bank in the central Philippines

    • Microfinance Operation started in 1999

    • Group-liability lending program (BULAK) has over 400 centers and 19,000 clients

    • PAR (portfolio at risk) is 3.7%


Bulak program

BULAK Program

  • Program: BULAK (Bangon Ug Lihok Alang sa Kalambuan)

    • Target pop: Business women in rural areas

    • Two layers of liability: group and center

    • Initial Loan size: P3000 - P5000 ($60-$90)

    • Loan term between 4 - 6 months

    • Weekly center meetings

    • Weekly deposits in center, group, and personal savings accounts


Group versus individual liability a field experiment in the philippines

Experimental Design

Sample Framework

  • 169 centers in Leyte Island (161 existing in Aug. 2004 and 8 centers formed before Nov. 2004)

  • Centers handled by 11 credit officers in 6 branches

    Conversion of BULAK Centers

  • Removing group liability

    Group members are no longer liable for each other’s loan.

  • Dissolving center/group savings

    Savings are entirely personalized with NO change to total deposit.

    Randomization

  • Stratified by credit officer and center age

  • Done in three waves


Experimental design1

Experimental Design

161 BULAK Centers

May 2005

August 2004

November 2004

January 2006

8 New centers opened

2 centers dissolved

4 centers dissolved

11 Centers Converted

24 Centers Converted

45 Centers Converted

Total 167 Centers

88 control 79 converted

Total 169 Centers

134 control 35 converted

150 control

11 converted

Total 135 Centers

66 control centers 69 converted centers


Results

Results

  • Default

    • No change in default overall

    • Better performance in converted centers for individuals with tighter social network

    • Indicates that group liability is not necessary to mitigate moral hazard.

  • Growth

    • Retention increases

    • Program attracts more clients

  • Savings

    • No change

  • Loan size

    • decreases, slightly (savings withdrawal effect?)


Group versus individual liability a field experiment in the philippines

Results

  • Evidence of monitoring effects

    • Both baseline and new clients in converted centers remember less about other members’ defaults

  • Evidence of selection effects

    • New clients in converted centers are less likely to predict defaults of other members correctly.

  • Social network

    • Mostly no change. Some small evidence of fewer side-loans (insurance?) in converted centers.


Conclusion

Conclusion

  • Evidence of mechanisms of screening & monitoring.

  • But they do not add up and lead to default!

  • Why?

    • Perhaps not enough time

    • Perhaps simply not economically significant


Next steps

Next Steps

  • Design of New Areas (ongoing)

Converted to individual liability

Existing groups

Stay

Converted to individual liability after 1st cycle

Group

Stay

New areas

Individual lending

Control


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