Group Lending Versus Individual Lending in Microfinance

This paper focuses on how MFI decisions to offer either group or individual loans depend on loan size, refinancing conditions and competitive pressure in the microfinance market. MFIs have been mostly associated with group lending, but are increasingly offering individual loans. MFI clients lack collateral and have no documented credit history. Hence, MFIs are unable to screen borrowers and secure loans with collateral. However, they use different lending strategies and incentives to monitor borrowers, such as:

• Group lending strategies transfer monitoring to borrowers, where joint liability ensures strong incentives to members to help their peers succeed;
• Individual lending strategies retain the monitoring role with the MFI, where incentives to borrowers include exemption from additional risk, gain in privacy and time saving.

Study results show that MFIs decide to offer individual loans when loan sizes are small, refinancing costs are low and competition is intense. Finally, the analysis predicts that individual loan contracts will become more common in the microfinance market given continued capital market access and rising MFI competition.