Liability Structure in Small-Scale Finance: Evidence From a Natural Experiment

This paper studies results of the shift from individual lending to group lending in an Indian MFI to compare loan repayment and savings discipline of the two lending methodologies.

The success of the group liability contract lending methodology at Grameen Bank led to is replication in several countries. Research regarding the efficiency of individual lending mechanisms and the optimal loan contract structure is limited. This paper examines data at Saath, an Indian MFI which switched from individual to group lending in 2007, to examine loan performance and estimate the joint effect of assortative peer matching and peer monitoring under group lending.

Results of the study have significant implications for microlenders and policy-makers around the world. Key findings include:

• Group liability structure significantly improves repayment rates;
• Monthly compulsory savings under group liability displays greater discipline;
• Group liability may be a particularly effective contract in improving repayment behaviour, especially for existing clients.