Panelists explore group liability vs. individual liability in microfinance lending

Ms. Rebecca Hughes, Innovations for Poverty Action (IPA)
Conventional wisdom suggests that group liability loans in microfinance are more effective in increasing repayment rates. Ms. Rebecca Hughes of Innovations for Poverty Action (IPA) explored this issue and presented IPA’s study results at the 2010 RBAP-MABS National Roundtable Convention held in Manila on June 2-3 June.
IPA’s study, designed and executed with partner bank Green Bank, found no measureable difference in repayment rates between group and individual liability loans. Additionally, the dropout rate of clients was no different in these two borrower populations. The study showed individual liability loans appealed more to new clients, but were not as popular with account officers who spend up to 90 minutes more per week on repayment activities for individual liability, as opposed to group liability loan clients.
The IPA study also explored whether moving from group liability to individual liability affected the social interaction among borrowers. (Note that in this study, the structure of the “center” – members of borrower groups that meet weekly to collect payments, discuss business, socialize, etc. – was kept in place; only the liability of the debt was transferred from the group to the individual.) The study found that there was less social cohesion as borrowers converted from group liability loans to individual liability loans. One piece of evidence Ms. Hughes cited was the decrease in spending on holiday parties among the center members. Additionally, new members within a center under the individual liability model were not likely to know each other as opposed to group lending, where existing clients were more likely to know the new borrowers. However, Ms. Hughes’ key takeaway was that by expanding individual liability lending products among its group liability product portfolio, a bank may deepen client outreach and provide more desired flexibility to its clients. Ms. Hughes stressed that additional studies should be conducted to measure the significance of these results.
For more information about IPA’s work on group versus individual liability, please review their study it conducted in coordination with the Financial Access Initiative.
Ms. Rebecca Hughes, Innovations for Poverty Action (IPA)

Rebecca Hughes

Conventional wisdom suggests that group liability loans in microfinance are more effective in increasing repayment rates. Ms. Rebecca Hughes of Innovations for Poverty Action (IPA) explored this issue and presented IPA’s study results at the 2010 RBAP-MABS National Roundtable Convention held in Manila on June 2-3.

IPA’s study, designed and executed with partner Green Bank, found no measureable difference in repayment rates between group and individual liability loans. Additionally, the dropout rate of clients was no different in these two borrower populations. The study showed individual liability loans appealed more to new clients, but were not as popular with account officers who spend up to 90 minutes more per week on repayment activities for individual liability, as opposed to group liability loan clients.

The IPA study also explored whether moving from group liability to individual liability affected social interaction among borrowers. (Note that in this study, the structure of the “center” – members of borrower groups that meet weekly to collect payments, discuss business, socialize, etc. – was kept in place; only the liability of the debt was transferred from the group to the individual.) The study found that there was less social cohesion as borrowers converted from group liability loans to individual liability loans. One piece of evidence Ms. Hughes cited was the decrease in spending on holiday parties among the center members. Additionally, new members within a center under the individual liability model were not likely to know each other as opposed to group lending, where existing clients were more likely to know the new borrowers. However, Ms. Hughes’ key takeaway was that by expanding individual liability lending products among its group liability product portfolio, a bank may deepen client outreach and provide more desired flexibility to its clients. Ms. Hughes stressed that additional studies should be conducted to measure the significance of these results.

For more information about IPA’s work on group versus individual liability, please review their study conducted in coordination with the Financial Access Initiative.
View more presentations from MABSIV.

Mr. Gerald Guillen, Green Bank

Gerald GuillenGreen Bank’s microfinance unit head, Mr. Gerald Guillen, shared his experiences with transitioning clients from a group liability product to an individual liability product. Through this transition, the bank held in-house training for all account officers and supervisors, and held regular meetings to track operational issues.

To entice clients to take part in this transition, they positioned it as a reward for their repayment performance. By doing this, Green Bank realized increases in both personal savings and the number of center members.

One negative impact the bank found was a decrease in the sense of unity among the center members, corroborated by IPA’s study described above.

Ms. Jennifer Sabianan, MABS

Jennifer SabiananMs. Jennifer Sabianan, a MABS Microfinance Specialist, closed the session by providing some useful suggestions for banks to consider if they choose to transition group liability loan clients to individual liability lending. She noted that banks must mitigate group tension and client loss of interest in the product by regularly listening to client feedback via focus groups and/or survey tools as least once a year. Additionally, banks should frequently gauge client interest in new loan products and study the service and product offerings of competitors.

One of the growing trends, often demanded by clients who start in group liability schemes, is the move toward individual liability plans. This is especially true for clients whose businesses are growing faster than other group members and need more customized individual loan products. Ms. Sabianan warned not to transition the group clients all at once. It is better to classify clients according to repayment performance and number of loan cycles, and gradually move the older client base to the individual liability products. She also presented a set of steps banks should follow for a smooth transition: 1) conduct market research, 2) design the new loan products or enhance existing loan products, 3) develop transition plan, 4) pilot test, 5) evaluate results of the pilot and 6) roll out the products in stages to clients.

Ms. Teresa Ganzon from Bangko Kabayan noted, however, that many group loan clients still value group and center meetings. She said that these clients often learn and share with one another; thus, she cautioned bankers to carefully evaluate their group lending schemes and offer an appropriate mix of group and individual loan products in order to better cater to different clients needs.

Look out for an upcoming Group Transitioning Workshop for Luzon rural banks on July 7-9, 2010 at GM Bank, Cabanatuan City, Nueva Ecija. For more information, please contact Ms. Sabianan at j.sabianan@rbapmabs.org.

Have you recently transitioned clients from group liability to individual liability products? How did you mitigate the risks through this transition? Do these products appeal to your clients? Share your stories and experiences by replying to this post.

Until next time, Mabuhay ang Microfinance!