Group Lending or Individual Lending? Evidence from a Randomized Field Experiment in Mongolia

This study presents results from a randomized field experiment in rural Mongolia where group lending and individual lending programs were randomly introduced across villages. The study measures and compares the effectiveness of these two types of microcredit in reducing poverty. It finds a positive impact of access to group loans on food consumption and entrepreneurship and results demonstrate the disciplining effect of group lending. Joint liability may deter borrowers from using loans for non-investment purposes. Study results on informal transfers are consistent with this hypothesis. Findings include:

• Likelihood of owning an enterprise increased more among households that were offered group loans;
• Enterprise profits increased over time among households that were offered group loans;
• There was no significant increase in consumption or enterprise ownership for individual lending;
• Borrowers in group lending villages were less likely to make informal transfers to families and friends while borrowers in individual lending villages were more likely to do so;
• There was no significant difference in repayment rates between the two lending programs, neither of which entailed weekly repayment meetings.