Group Lending versus Individual Lending in MongoliaPDF version

 
Researchers: 
Orazio Attanasio
Researchers: 
Britta Augsburg
Researchers: 
Ralph De Haas
Researchers: 
Emla Fitzsimons
Researchers: 
Heike Harmgart
Location: 
40 rural villages in northern Mongolia
Sample: 
1,148 poor women
Timeline: 
2008 - 2011
Policy Issue: 
Credit
Policy Issue: 
Financial Product Design
Policy Issue: 

Microfinance institutions (MFIs) provide formal financial services to millions of poor people around the world, but there is still much debate about the effectiveness of microcredit as a tool to combat poverty. Increased professionalism and scale among MFIs has made it less costly for them to monitor borrowers’ creditworthiness, reducing their reliance on the peer enforcement of group lending. After years of rapid growth, many large MFIs have started to switch from a group-loan model of microcredit, pioneered by the Grameen Bank in the 1970s, to an individual-loan model. Yet, there is little evidence on the relative impacts of individual lending versus group lending on household consumption, income, and enterprise creation.

Context of the Evaluation: 

Access to microcredit is widespread in Mongolia, but the country’s low population density makes the extension of microcredit services to remote borrowers very costly. Rural women and poor households have considerably less access to microcredit than richer, male, and urban Mongolians. MFIs are therefore looking for more cost-efficient ways to serve poor, rural borrowers.  

Mongolian microcredit has traditionally been provided in the form of individual loans. In the past, many MFIs assumed that nomadic indigenous Mongolians would not take up group loans because they had small social networks outside their extended families. But in recent years, informal collective self-help groups have developed in rural areas across the country and have begun to offer loans to their members, suggesting that group lending may be feasible in Mongolia. 

Details of the Intervention: 

Researchers examined the effectiveness of having access to either group or individual loans in reducing poverty among rural women. In January 2008, XacBank loan officers partnered with the Mongolian Women’s Federation (a large local NGO) to deliver information sessions to women in 40 villages in rural northern Mongolia. The information sessions explained that there was a two-thirds chance that XacBank would start to offer either group or individual business loans in their village. Women who wanted to participate could sign up and were asked to list potential groups of 7 to 15 women. Only women with less than 1 million Mongolian tögrög (US $869) in assets and less than MNT 200,000 (US $174) in monthly earnings were deemed eligible to participate. After a baseline survey, 15 villages were randomly selected to receive access to group loans, 15 to receive individual loans, and 10 to serve as comparison villages. 

The interest rate for both group and individual loans varied between 1.5 and 2 percent per month, and was reduced by 0.1 percent after each successful repayment cycle. Both types of loans offered a range of amounts and maturity periods. The average size of the first loan was US $411 and the average maturity was 224 days for individual loans, and US $279 and 199 days for group loans. Women formed the loan groups and had to build up joint savings equal to 20 percent of the loan before receiving one. XacBank did not require collateral for individual loans, but accepted it if it was available; 91 percent of the individual loans were collateralized. Neither loan type required public repayment meetings or other mandatory activities besides repayment. Households had been borrowing for five months on average by the time of the follow-up survey in 2009.

Results and Policy Lessons: 

Loan Take-Up and Use: The intervention led to a significant increase in borrowing in lending villages, and women in group-lending villages were more likely to borrow than women in individual-lending villages. After 18 months, 57 percent of survey respondents in group-lending villages and 50 percent in individual-lending villages borrowed from XacBank, and households in both types of lending villages were 24 percentage points more likely to receive microcredit than comparison households. Two thirds of all borrowers in both group- and individual-lending villages used their first loans primarily to invest in a new or existing enterprise, usually by purchasing livestock, tools, or machinery, and used the remainder for household expenses.   

Impacts on Enterprise Creation: Women in group-lending villages were 10 percentage points more likely to own an enterprise than comparison households, and the impact was even larger for less educated women, who were 30 percentage points more likely to own an enterprise.  Individual loans had no significant effect on women creating businesses of their own, but women in individual-lending villages were 12 percentage points more likely to operate a business jointly with their spouse. Neither group nor individual loans increased household income, though the survey may have taken place too early to observe any effects on income. 

Impacts on Consumption: Access to group loans led to more and healthier food consumption, while individual loans had no effect. Food consumption increased by 17 percentage points in households in group-lending villages, and they were also significantly more likely to consume dairy products, fruit and vegetables, and non-alcoholic drinks than comparison households. 

Impacts on Repayment: Both individual and group loans resulted in similar repayment rates, providing evidence against the hypothesis that microcredit repayment rates are high primarily because of public weekly repayment meetings. Collateral was used to guarantee the vast majority of loans, which may also have contributed to their high repayment rates. 

Related Papers Citations: 

Attanasio, Orazio, Britta Augsburg, Ralph De Haas, Emla Fitzsimons, and Heike Harmgart. "Group Lending or Individual Lending? Evidence from a Randomized Field Experiment in Mongolia." Working Paper, December 2011.