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Publication Detail
YU 2006-01: Group versus Individual Liability: A Field Experiment in the Philippines

Many cite group liability as the key innovation that led to the explosion of the microfinance industry, beginning with the Grameen Bank in the 1970s in Bangladesh and continuing on today in many countries around the world. Group liability is mostly credited with improving repayment rates and lowering the transaction costs of lending to the poor by providing incentives for peers to screen, monitor and enforce each otherís loans. Thus group liability is believed to help overcome information asymmetries and thus solve credit market failures. However, some argue that group liability discourages good clients from borrowing, thus jeopardizing growth and sustainability. Therefore, it remains ambiguous whether the net effect of group liability will improve or worsen lenderís profits and the poorís access to financial markets. We conducted a field experiment in the Philippines with a large rural bank to examine these issues. We randomly assigned half of the 169 pre-existing group liability "centers" of approximately twenty women to individual-liability centers (treatment) and left the other half as-is with group liability (control). We find that the conversion to individual liability does not change the repayment rate for pre-existing borrowers, and also leads to higher growth in center size by both keeping more pre-existing borrowers and attracting new ones.

PinoyME Foundation
Authors Keywords
Karlan, Dean; Gine, Xavier; microfinance; credit; Grameen Bank Approach;
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Published in 2006 and available in the Yale University or can be downloaded as full text Downloaded 691 times since November 25, 2011