Individual lending versus group lending: An evaluation with Kenya's microfinance data

Abstract

Group micro-lending has been used successfully in some parts of the world to expand the reach of microcredit programs. However, our study shows that microfinance institutions in Kenya prefer individual lending which is associated with higher default rates compared to group lending. The study also shows that high interest rates increase the odds of client delinquency while loan size is inversely related to delinquency. Given these findings, policymakers need to work for stability in the macro-environment to ensure interest rates charged by microfinance institutions (MFIs) remain stable and affordable. Alternatively, MFIs can develop a graduated scale for charging interest rates in which credit is extended to groups at first to hedge the firm against repayment risk; following this, the firm identifies individuals within the groups whose credit risk has improved and issue progressive individual loans to them. Such individual loans would fetch higher returns in form of interest for MFI and boost their outreach, reduce delinquency, and enhance self-sufficiency.