Grameen Bank Lending : Does Group Liability Matter?

Competing theories increasingly support
the positive role of social capital in small loan default
costs of group lending; at the same time, potential group
collusion may increase loan delinquencies. Findings from the
available literature are mixed on the role of the various
attributes of group lending. But past studies suffer from
estimation bias due to the unobserved sorting behavior of
group members and their other attributes. This paper
attempts to resolve that estimation bias by utilizing
longitudinal data from 297 Grameen Bank groups since their
inceptions. A dynamic lagged dependent model with correction
for time-varying heterogeneity of group and individual
behavior is applied to estimate the effect of group
liability in the Grameen Bank. The results suggest that
group liability matters in both loan disbursement and
repayment, with women less of a credit risk than men and
women's groups more homogeneous than men's.
Finally, the benefits of social capital outweigh the costs
of group collusion, especially for women's groups,
thereby reducing overall default rates. The risk-pooling
behavior of diverse men's groups increases men's
repayment behavior. Overall, group lending as practiced by
Grameen Bank appears to increase repayment rates.