The Design of Microfinance Institutions: Insights from the Laboratory

Economics

Speaker:Klaus Abbink, University of Nottingham
Date: Friday 14 November 2003
Time: 16:15
Location: Room 106 Streatam Court

Further details

(with Bernd Irlenbusch and Elke Renner)

Microfinance institutions (MFIs) provide poor people in developing countries with small loans given to jointly liable self-selected groups. There are now more than 5 million households served by MFI schemes throughout the world. The optimal design of MFIs is an issue lively debated, where varying conditions make field experiments difficult. This research therefore uses laboratory experiments to observe participants' behaviour in modelled MFI scenarios. Group-lending involves a fundamental dilemma: While joint liability can provide insurance against individual project failures, it creates counterproductive free-riding incentives. The experimental model addresses this dilemma: Each group member invests in an individual risky project. Participants decide whether to contribute to group repayment. Only those with successful projects can contribute. The experiment ends if too few repay. This feature models dynamic incentives through follow-up loans subject to repayment. We investigate critical design features of MFI. We observe that group size has little effect on overall repayment rates, as free-riding in larger groups is compensated for by the lower risk of involunatry failure. Self-selected groups show initially higher but less stable repayment rates than random groups. High interest rates have discourageing as well as disciplining effects. (Presentation based on the papers "Interest Rates in Group Lending: A Behavioural Investigation" and "Group Size and Social Ties in Microfinance Institutions".)