Determinants of Repayment Performance in Credit Groups: The Role of Program Design, Intra-group Risk Pooling, and Social Cohesion In Madagascar
This paper investigates the effects of intergroup pooling of risky assets or projects on repayment rates. It undertakes descriptive and econometric analysis based on a random sample of 146 groups from six different lending programs in Madagascar: ODR-GVC (Grenier Villageois Commun), ACCS (Credit a Cuation Solidaire), KOBAMA, MALTO, FIFATA, CIDR (Centre International de developpement et de recherche) village banking.
In the sample households, more than half of total landholdings is of rainfed uplands. Returns from these holdings are highly variable, and thereby riskier, compared to irrigated lowland rice cultivation which is considered an asset yielding relatively safe returns. After controlling for community level and program design factors that influence the repayment rate of group loans, the results show:
- Rejection of the hypothesis that groups consisting of members facing homogenous risk exposure have higher repayment rates;
- With an increasing variability of upland holdings among group members, repayment rates significantly improve.
The paper concludes that groups appear to exploit scope and scale economies of risk by pooling risks and entering into informal insurance contracts. Diversification of joint portfolios among members and related risk pooling and social cohesion can therefore improve repayment performance in such schemes.
