Reducing the Strain of Group Microloans with a Small Collateral Requirement
In an experimental game in Tanzania, we tested how a small individual collateral requirement would affect the decision to borrow and individual effort under a group loan. A 20-percent collateral increased individual effort and repayment while reducing the number of farmers who take loans. The dynamics of this shift suggest that adding an individual collateral could increase overall satisfaction among members of microcredit groups while expanding access to credit in new areas.
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Group lending revolutionized financing for farmers to invest in more profitable crops. However, by shifting the burden of selecting borrowers and collecting debts to members of a group, this model also risks important family and community relationships in the event of defaults. In an experimental game in Tanzania, we tested how a small individual collateral requirement would affect the decision to borrow and individual effort under a group loan. A 20-percent collateral increased individual effort and repayment while reducing the number of farmers who take loans.
