1. Group versus Individual Liability The Philippines Lecture # 20 Week 12

2. Structure of this class Salient features of the Philippines Reminder of “advantages” of group lending in theory Potential disadvantages reviewed Design of the experiment at Green Bank Caraga Main results Concluding comment

3. The Philippines Population: About 97 million Fast growing economy Considered a middle income country Remittances constitute a very important source of revenue average household Mostly Catholic With at least a dozen Grameen replications

4. Advantages of group lending in theory Group lending can potentially overcome: Adverse selection Moral hazard Enforcement And relative to the MFI borrowers can do it more efficiently under group – lending contracts involving joint responsibility

5. Disadvantages Clients dislike the tension caused by group liability  group dropouts “Bad” clients can free ride on “good” clients More costly for “good risk” clients  dropouts and more difficult to attract good clients As groups “mature” more heterogeneity in demand for credit  small-loan borrowers unwilling to remain

6. Experimental design at Green Bank Caraga Goal: Testing whether the removal of group liability has an impact on repayment rates, client retention, and group cohesion Experiment: Green Bank Caraga removed the group liability component from their Grameen-style group liability contract (BULAK) Random conversion of existing “centers” with group-liability loans into individual liability loans and removal of group savings But all “other aspects” remain the same, including weekly meetings for public repayments

7. Data 08/04:First wave on conversion at 11 randomly selected centers 11/04:Second wave of conversion at 24 randomly selected centers 05/05: Third wave of conversion at 45 randomly selected centers Totals: 78 “converted” centers (treatment) 86 original or “group liability centers (controls)

8. Data (cont) Sources: Green Bank’s data (before and after the experiment) on repayment, savings, retention for more than 3,000 clients Credit officers reports on time allocation (attending meetings, time allocation, etc) Baseline survey in 2004 Clients’ surveys in 2005 Follow-up survey in 2006

9. Results Conversion to individual liability had no adverse (or advantageous) effect on client repayment Note, however, that repayment is still public, and some clients may wish to protect their reputation Voluntary savings behavior does not change after conversion If conversion implies reduction in peer pressure and increased bank pressure to repay, the net effect is “nil” Reduction in loan size Dropouts: remain the same but composition changes

10. Results (cont) Individual liability: Attracts new clients Increases the size of the centers Increases cohesion as (probability of center dissolving is lower)

11. Results (cont) Lender Costs Individual liability does not change time allocation of credit officers, so it does not increase lender’s costs Center activities Individual liability leads to lower penalties Individual liability “might” have an impact on center cohesion

12. Results Selection and Monitoring More prior knowledge under individual liability and less monitoring Less knowledge of each other’s business activity (also less monitoring) No evidence on “bad risks” joining individual liability centers Demand for joint liability and for individual liability

13. Results (cont) Trust. “Defaults” are lower under individual liability in groups with stronger “social networks” Changes in social networks. Fewer incentives to monitor on the one hand, but better quality of the interactions on the other. Net impact: not significant

14. Conclusion The shift from group to individual liability: -No change in repayment rates and better at attracting new clients and keeping existing ones -Some evidence on the theoretical issues on joint liability but such evidence does not translate itself into lower or higher default rates

15. Conclusions ( cont) Restricted ability to predict whether individual liability programs can work when selection occurs under individual liability Cannot assess if centers have to achieve a certain age before group liability can be “successfully” removed. “Recent trends towards more individual loans and more flexibility might be a step in the right direction” Section: 2 items: 1) deeper understanding of social capital, and 2) Econometric techniques in the Gine-karlan (2006) paper  Next Class: Consumer credit and flexibility (Dowla, Karlan & Karlan) Have a nice weekend -