Factors Affecting Repayment Rates in Group-Based Lending: Findings From Bangladesh and Madagascar

This paper summarizes results of International Food Policy Research Institute's (IFPRI) Bangladesh and Madagascar study that examines factors affecting group repayment rates and what MFIs should consider when initiating group formation.

Stating that even small loan losses can weaken an MFI, the study finds that:

• Bigger groups lead to poorer screening and monitoring;
• Bigger loan amounts may result in unwilling default;
• Greater the diversity of asset portfolio, lesser the covariant incomes within the group;
• Higher level of credit rationing may decrease incentives to adhere to contracted repayment schedule;
• Cultural factors may dilute the enforcement process;
• Risk-averse households make special efforts to fulfill repayment obligations;
• Groups with higher percentage of women have higher repayment rates as they select less risky projects and are more careful about fulfilling repayment obligations;
• Screening and monitoring are more effective within groups formed on their own than in those formed with the intervention of an outside agent;
• Local economy, market opportunities and other alternative credit options are important factors affecting delinquency rates.

Finally, the paper states that objective and realistic project evaluation is necessary prior to loan approval.