Determinants of repayment performance in credit groups: The role of program design, intragroup risk pooling, and social cohesion

The purpose of this article is to investigate the effects of intragroup pooling of risky assets or projects by controlling for community-level and program design factors that influence the repayment rate of group loans. The descriptive and econometric analysis is based on a random sample of 146 groups from six different group-lending programs in Madagascar. Apart from external rules governing member eligibility, the formation of these groups is basically an endogenous process. Thus, individuals are allowed to team up with their preferred peers. Most Malagasy households grow rice in irrigated lowlands or terraces. However, rainfed uplands constitute more than half of total landholdings in the sample households. Since the returns from uplands are highly variable, upland can be considered a risky asset, while irrigated lowland for rice cultivation is an asset that yields relatively safe returns. The econometric analysis of replayment rates rejects the hypothesis that groups consisting of members with homogeneous risk exposure have higher repayment rates. On the contrary, with an increasing variability of upland holdings among members, replayment rates of group-lending schemes significantly improve. The results indicate that groups exploit scope and scale economies of risk by pooling risks and by entering into informal insurance contracts. The analysis confirms the role of social cohesion and other major hypothesized determinants that have been postulated in the recent literature on determinants of group replayment.