Group Credit: A Means to Improve Information Transfer and Loan Repayment Performance

Information asymmetries plague credit markets in developing countries, leading to selective rationing and market segmentation.

Studies viability and cost effectiveness of group credit as a means to transmit information on borrower creditworthiness, using data collected from FINCA programme in Costa Rica.

Finds that:

• Formal screening mechanisms in the form of a written code as opposed to informal screening based on reputation and social ties were perceived as more important in reducing loan delinquency, both between members and the group and between the group and FINCA;
• When observable individual creditworthiness was controlled for, individuals belonging to groups that engaged in informal screening were less likely to be delinquent. Implies group do have access to unique information on character attributes not easily obtainable by outsiders;
• Less than half the groups had positive rates of economic return which suggests that although group lending results in informational gains, it is a cost sensitive institutional design.