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DETERMINANTS OF MICROFINANCE GROUP PERFORMANCE: AN EMPIRICAL ANALYSIS OF SELF HELP GROUPS IN INDIA
Charlotte VERHELLE Lodewijk BERLAGE
Contact person: Lodewijk Berlage, Department of Economics, K.U. Leuven, Naamsestraat 69, B-3000 Leuven, Belgium. Email: email@example.com
TABLE OF CONTENTS Section 1 Section 2 Introduction Literature on repayment performance in microfinance 2.1. 2.2. Section 3 Section 4 Section 5 Theory Empirical analysis
Structure of group based microfinance systems in India The promoting NGOs The data 5.1. 5.2. 5.3. Data Collection and Preliminary Data Analysis Measurement of SHGs’ performance Description of potential determinants of performance
Econometric analysis of determinants of success 6.1 6.2 Regression results: first approach Regression results: second approach
Section 7 References Appendix
SECTION 1 INTRODUCTION
Since the 1970s, microcredit and subsequently microfinance programs have been promoted in many developing countries to meet the financial needs of the rural poor. Poor people’s access to financial services has traditionally been restricted due to a combination of information and enforcement problems with high transaction costs involved in lending small amounts to a large number of poor households. The new microfinance institutions seem to be able to circumvent the problems faced by formal financial institutions by relying on information flows within tightly knit communities and on the use of social collateral to alleviate respectively the information and the enforcement problems. The apparent success of several microfinance schemes, e.g. the Grameen Bank solidarity group scheme, incited researchers to examine the determinants of successful performance and practitioners to replicate successful schemes. The spread of these schemes was encouraged by the
Microcredit Summit of 1997, where it was decided to advance by 2005 $21.6 billion to 100 million of the world’s poor in the form of micro enterprise loans. With donor funding pouring in while available resources are being reallocated from traditional poverty alleviation programs to microfinance, a proliferation of new microfinance initiatives has been observed. Often these are replications of successful schemes or methodologies, frequently applied in a social and cultural context which is different from that of the prototype. For the success of such replications it is important to understand the roles of the various factors driving microfinance performance.
Theoretical insights as to the determinants of successful microfinance performance abound. The empirical research, however, falls short of theory. Several authors (e.g. Morduch (1999)) have suggested that narrowing the gap between theory and evidence could be an important step towards evaluating and improving programs. The purpose of this paper is to contribute to this purpose by investigating the effects on the performance of Self Help Groups (SHGs) in India of the mechanisms identified in the theoretical literature.
The paper is organized as follows: the rationale for microfinance and the empirical evidence of the determinants of group performance are discussed in the following section. In section 3, we outline the structure of the Self Help Group microfinance system in India and in section 4 we describe the major characteristics of the supporting NGOs included in our survey. The survey covered 63 randomly selected Self Help Groups in Chhattisgarh; these groups are supported by four different NGOs. We start our empirical analysis in section 5 with a description of the data collection and some descriptive statistics on performance indicators
Under imperfect information. In section 6 we discuss the results of an econometric analysis on the link between performance and potential determinants. the functions of screening. The key is that group-lending schemes provide incentives for similar types to cluster together. This reduces transaction costs and renders banking with poor loan applicants less costly than traditional banking practices for financial intermediaries. Ghatak (1999. properly. 1990). These problems are: (a) to ascertain what kind of a risk the potential borrower is (the problem of adverse selection). SECTION 2 LITERATURE MICROFINANCE ON REPAYMENT PERFORMANCE IN 2.and on possible determinants of success. so that she will be able to repay it (the problem of moral hazard) and (c) to find methods to force the borrower to repay the loan if she is reluctant to do so (the enforcement problem). Section 7 concludes. A vast literature investigates this peer selection effect of joint liability (see among others Varian (1990). It is argued by Zeller (1998) that the often-postulated risk homogeneity among group members has trade-offs by reducing the group’s ability to repay loans in times of distress and 3 .1. Ghatak and Guinnane (1999). By utilizing the informational advantages of members belonging to the same community and their potential to exert pressure on borrowers. Through joint- liability lending microfinance institutions can lessen the three major problems facing formal credit institutions in lending to the poor. Hence. monitoring and enforcement of repayment are to a large extent transferred from the financial institution to the group members (Zeller. borrowing groups under a joint-liability contract are in a better position than formal banking institutions to address these problems (Ghatak and Guinnane. Theory The success of microfinance in terms of credit repayment triggered the interest of many economists in the mechanisms generating these high repayment rates. 2000) Laffont and N’Guessan (2000) and Armendáriz de Aghion and Gollier (2000)). 1999). By drawing on local information networks group lending enables the financial institutions to separate low risk from high risk borrowers. 1998). joint liability may first of all be used as part of a screening mechanism to mitigate the problems created by adverse selection. (b) to make sure she will utilize the loan once made. Several models of joint-liability lending have been proposed that stress various aspects of microcredit’s informational and enforcement advantages over other forms of lending. the so called assortative matching property (Stiglitz.
Furthermore. Theories of peer monitoring (besides the above mentioned. Sadoulet (2000) concludes that groups homogeneous and heterogenous in risk profiles are both formed. Groups. reduce the incidence of strategic default and enhance the lender’s ability to elicit debt repayments (Armendáriz de Aghion. In addition. Joint liability agreements can thus potentially induce peer monitoring. that maximize the chances of project success. they have an incentive to monitor each other and to enforce debt repayments by threatening with social sanctions. but also as a rational response to missing insurance markets (Sadoulet and Carpenter. In relatively small groups consisting of neighbours. As the group members lose access to future credit in case the group defaults. group members can potentially use social sanctions or seize physical collateral of the defaulter. Besley and Coate (1995) show that the wrath of other group members incurred by the defaulter under group lending may constitute a powerful incentive device in tightly knit communities. leads us to the enforcement issue. Without the pressure of 4 . Microfinance institutions are widely perceived to face the twin disadvantages of operating in environments where diversion is easy and collateral is scarce. are applied. group lending will necessarily yield higher repayment rates than individual lending. 1990). but more profitable. group credit alleviates the moral hazard or incentive problem by inducing members of credit groups to monitor their peers (Wenner. 1989 in Wenner. The enforcement problem arises from the lender’s limited ability to apply sanctions against a delinquent borrower. 2001). diversion of funds is easily detected and members are in a good position to assess whether the necessary diligence and appropriate production techniques. While the formal lender usually has limited options to compel repayment from delinquent borrowers. joint-liability lending will improve repayment rates through peer monitoring. see also Besley and Coate (1995). The heterogeneous groups result from borrowers’ desire to maximize the expected returns. if social penalties are sufficiently severe. 1999).to take advantage of more risky. The apparent dependency of the effectiveness of peer monitoring in deterring moral hazard upon the ability to impose social sanctions. Thus risk heterogeneity in groups not only emerges as a second-best due to matching frictions. however. they have access to superior enforcement technologies in the sense that they can impose social sanctions upon peers who default strategically. enterprises by spreading risks among members of the same group. may have a comparative advantage in the enforcement of loan repayment. In a context of missing insurance markets. even when monitoring is costly. 1995 and Stiglitz. Hence. Ghatak and Guinnane (1999) and Conning (1999)) find that as long as social sanctions are effective or monitoring costs are low.
sanctions against a defaulting member. 5 . alleviating the enforcement problem. the borrower’s assessment of his/her peers’ likelihood of defaulting can trigger the borrower’s own decision to default. Sadoulet and Carpenter (2001) conclude that joint liability makes promises of insurance credible. In his view the use of dynamic incentives and regular repayment schedules to help maintain high repayment rates without requiring collateral and without using group lending contracts that feature joint liability is often disregarded. while sanctioning wilful defaulters (Sharma and Zeller. the vast theoretical literature shows that joint liability entails an enhanced repayment performance through its self-selection effect. Paxton. This is in line with the critique of Morduch (1999) that many incentives are perhaps wrongly attributed to the joint-liability component. while they are more likely to be driven by the non-refinancing threat or other mechanisms differentiating microfinance contracts from standard loan contracts. Furthermore. Graham and Thraen (2000) remark that in practice members of lending groups rarely are held liable for repayment of loans of other group members. and through its use of social sanctions and insurance mechanisms. Members may have an incentive to undertake riskier projects. hence the borrower not necessarily bears the full burden of default. Nevertheless. deterring moral hazard. Summarizing. under joint-liability lending. but that instead they are barred from future access to loans. Besides. as the peers are liable for debt repayment. mitigating the adverse selection problem. This could lead to a ‘debtor run’ or domino effect. 1995). whereby all group members default on their loan even when some would or could have repaid their individual loans. 1997). group members appear to be in a better position to assess the reason for default and to offer insurance services to members experiencing shocks beyond their control. Besides. as pointed out by Besley and Coate (1995). group loan repayment may be either higher or lower than under individual lending. Hence. joint liability also has several disadvantages (Sharma and Zeller. 1997). Furthermore. successful group members may have an incentive to repay the loans of group members whose projects have yielded insufficient returns (Besley and Coate. through its reliance upon existing social ties and peer monitoring. Sadoulet (2000) points out that the ability of borrowers to exclude defaulters from future rounds of loans allows insurance contracts to be sustained and that the existence of a sanctioning mechanism allows their enforcement.
A regular repayment schedule with repayment starting nearly immediately after disbursement enables the lender to screen out undisciplined borrowers and gives an early warning about emerging problems. In a first attempt to fill this gap. Competition. Borrowers may also be inclined to default on their last loan if the program is known to terminate. Repayment performance was better in groups engaged in active screening of their members. the lending institutions are partly lending against the household’s other income sources. Wenner (1995) examines the determinants of performance of 25 Costa Rican credit groups. we conclude that there may be more to microfinance than joint-liability lending.2. not the threat of social sanctions is a primary incentive for repayment. Empirical analysis As mentioned by among others Wydick (1999) and Paxton. 6 . such as credit worthiness. The repeated nature of the interactions and the credible threat to cut off any future lending when loans are not repaid can be exploited to overcome information problems and improve efficiency. Especially the positive impact of a progressive lending mechanism in combination with denial of additional credit upon default and of the use of regular repayment schedules may have been underestimated. Besides. there seem to be other forces at work as well. this conclusion should be interpreted with caution. Sadoulet (2000) points to what he regards as a popular misconception of the role of ‘social collateral’.The so-called dynamic incentives refer to a stream of increasingly larger loans1. In his paper the desire to maintain access to credit. easing defaulters’ access to alternative credit sources. whether lending is group-based or individual-based (Armendáriz de Aghion and Morduch. empirical testing lags behind the extensive theoretical literature. the progressive lending cum non-refinancing threat will work better in areas with relatively low mobility. If borrowers do not want to maintain access to future loans. may harm the strength of this dynamic incentive. Of the two measures of 1 Hulme and Mosley (1996) term this ‘progressive lending’. not just the income stream of the risky project as this does not materialize instantly. He finds evidence that the use of ‘inside’ information on character attributes. However. For the same reason. Although the mechanisms and incentive devices through which joint liability may enhance repayment performance have been extensively discussed in the theoretical literature. in credit groups reduces the incidence of default by individuals. In brief. 2. they will form groups with other such borrowers and collude against the bank. 2000). Graham and Thraen (2000).
The other proxy (informal screening according to reputation) ‘surprisingly and unexpectedly’ affects delinquency in a highly significant. the greater the value placed on the credit services of the group program. monitoring. Zeller (1998) emphasises the importance of risk pooling and informal intra-group insurance2 in driving the success of 146 groups in Madagascar. According to Sharma and Zeller (1997) the success of group lending cannot just be attributed to innovations that reduce the cost of screening. 1999 and Laffont and N’Guessan. On the other hand. the presence of several agricultural input retailers and a lower exposure to covariate risks significantly improve repayment performance. and more isolated communities are linked with better performance. positive way. because of increased costs of coordination. 2000). however. and even of communities that have higher than average rates of poverty. but also to the perception of the long-lasting nature of the program by the intended borrowers in small rural communities. Furthermore. Sharma and Zeller (1997) also observe the positive impact of relatively remote communities. monitoring and enforcing loan contracts. As the latter characteristics are more likely to prevail in 2 Nevertheless. a high proportion of relatives within a group and high loan amounts have a negative impact on group performance. 7 . this result is hardly surprising. the less buoyant the local economy and the less alternative sources of credit available. and moral hazard that come with greater heterogeneity in groups. on the repayment rates in a sample of 128 groups interviewed in Bangladesh.screening used. The more remote the village. the group members are observed to enforce repayment by liquidating assets of the defaulting member (Zeller. which acts as a kind of intra-group insurance. Gains in the repayment rates due to risk diversification diminish at the margin. Wenner’s analysis also suggests that savings mobilisation. communities characterized by a relatively high degree of monetarization. the analysis confirms that clear internal rules of conduct. This is also apparent from the negative impact that informal mutual self-help networks and insurance groups in the village produce on the repayment performance of the groups examined. if a group member strategically defaults on the loan. only one (the existence of a written code) supports this conclusion. group size. The explanation could lie in the fact that this proxy captures some aspects of social ties. 1998). As collusion may be more likely and enforcement more difficult in the presence of previously existing social ties (see among others Wydick. The repayment rates are especially high in groups which were initiated by the group members and consist of risk averse women with marginal land holdings. Zeller’s social cohesion index counting the number of common demographic and social characteristics among group members is found to be significantly linked with the repayment rate.
Paxton et al. In line with the findings of Zeller (1998). In rural groups. group solidarity and risk diversification are key features in overcoming problems. in this way they also control for possible endogeneity of certain characteristics like homogeneity and peer pressure. peer monitoring and group pressure on the provision of intra-group insurance. the presumed positive effects of homogeneity are offset by the negative effect of covariant risk. With regard to the risk pooling. As more members of the group experience repayment problems. The role of group solidarity outweighs coercive peer pressure behaviour. helping those with verifiable claims of hardship to repay loans. To a large extent the importance of this domino effect can be attributed to the specifics of the program investigated: the program administers individual loans to each member of the group and relies on joint liability as well as sectoral liability (the entire village is blocked from future loans upon default by a single group)4. They find the domino effect to be a significant determinant of repayment problems. group lending may be less effective in areas where social ties are strong. Due to the better information flow within the relatively small groups. Therefore. borrowing groups appear to function both as miniature insurance networks and as juries. most of the reasons for default in the sample could be classified as uncontrollable and not due to irresponsible or negligent behaviour. we believe this domino effect to be less of a problem in our groups. 4 As the programs we visited in India do not feature this stringent sectoral liability component. the group’s willingness to exert peer pressure on defaulting members nonetheless seems to be of primary importance in deterring moral hazard behaviour. Although they do not specifically address the endogeneity problem.less remote villages. The institution’s ability to harness previously existing social ties has virtually no effect on borrowing group performance. Graham and Thraen (2000)3. while threatening indolent and risky borrowers with expulsion from the group. easily measurable socio-economic explanatory variables with more untraditional latent variables like the domino effect and homogeneity. Wydick concludes that in order to reduce problems related to asymmetric information in credit markets. 8 . Repayment problems are 3 In order to incorporate traditional. Finally. Zeller’s conclusions are contrary to the findings of Wenner (1995) and Sharma and Zeller (1997). the ability and willingness of the other group members to cover the full repayment diminishes. Groups characterised before their inception by strong friendship bonds seem more compassionate towards defaulting members. In brief. little or no pressure is exerted. The success of group lending appears to be driven by peer monitoring and intra-group insurance. The potential of social sanctions plays a secondary and supporting role. the mitigation of moral hazard and overall group repayment performance in 137 Guatemalan groups. one hundred forty Burkinabe credit groups were surveyed by Paxton. Wydick (1999) analyses the effect of social ties. (2000) develop a multistage mean-covariance model.
In addition. several authors (see among others Zeller (1998). the existing empirical studies highlight the importance of intra-group insurance. 9 . but serves as an indication of creditworthiness5. Group solidarity and risk diversification appear to be unambiguously linked with higher group loan repayment. Sadoulet and Carpenter (2001) and Mahmud (2001)) stress that more empirical research is needed on the determinants of group performance. or by a microfinance institution (MFI) or bank. usually a NGO. however. SHG members belong to the same village. Group pressure and selfselection seem to play a secondary role. 5 This also stands in contrast with the theoretical point previously discussed where access to alternative credit sources was deemed detrimental to the strength of the non-refinancing threat and hence group performance. In view of the beneficial impact on program design and hence on program performance and on poverty alleviation. Self Help Groups (SHG) normally consist of 10 to 20 predominantly rural female members. by the positive influence of adequate leadership and training. This paper attempts to accommodate this demand through its examination of the driving forces behind the performance of Indian Self Help Groups. risk diversification. The group formation process may be facilitated by a Promoting Implementing Agency (PIA). Social ties tend to exert a negative impact on group performance. This negative effect is counteracted. 6 This section is based on Harper (2002) and Verhelle (2001). In summary. Unlike the findings of Wenner (1995) and Sharma and Zeller (1997). social ties and location in driving the success or failure of groups.more likely to occur in rural areas. SHG-membership is normally limited to one person per household. while the effect of social ties and remoteness is less clear-cut. default seems to increase with subsequent loan cycles. the Self Help Group approach6. SECTION 3 THE STRUCTURE OF GROUP BASED MICROFINANCE SYSTEMS IN INDIA In this section we briefly outline the main group-based microfinance system in India. Sometimes a SHG evolves from a traditional rotating savings and credit association (ROSCA) or from some other pre-existing group. access to other sources of credit does not have a negative impact on the group’s repayment performance. Groups being located in interior villages are mostly found to perform better than their urban counterparts.
mainly in the form of paddy. During their frequent meetings the SHG members make regular (small) savings contributions. it amounts to 2 to 3% per month. providing support in the advent of adversity and facilitating representation. The group can decide to keep the savings fund in cash in order to meet urgent credit needs of the members or to put it on a bank account. but the group is jointly liable for its repayment. for which specific training may be provided by the promoting institution. These transactions are recorded in the group’s register and.The rules and regulations governing the operation of the group are ideally set by the group itself in a democratic manner. They may satisfy their members’ needs by taking up only one or a few of the activities mentioned. NGOs. Upon accumulation of this savings fund. 8 In 1992 the Reserve Bank of India (RBI) already encouraged banks to consider credit operations to SHGs as an integral part of their rural credit delivery. the group can apply for outside credit from a bank or a MFI. Clusters and federations may enhance the effectiveness of SHGs by enabling networking. on terms and at interest rates decided by themselves. 7 10 . Several SHG models can be distinguished on the basis of the promoting institution and access to and source of outside credit. the promoting institution may assist the group in this respect. Moreover. for purposes. MFIs and the National Bank for Agriculture and Rural Development (NABARD) apparently bears fruit. it suggests that the actual achievements may exceed the targets. However. when available. which reaches SHGs through the District Rural Development Agencies and government departments and NGOs. The outside credit is used for loans given to individual members. according to the scheme it belongs to7. in the individual passbooks. intra-group loans are available for production as well as consumption purposes. the group may start lending to its members. If desired. In order to achieve this. several development programs were joined into the Swarnjayanti Gram Swarozgar Yojana (SGSY)-program. Generally. Self Help Groups often serve as a platform to address community problems or to undertake jointly social activities. SHGs were granted exemption from a number of official regulations. The interest rate charged to the members often exceeds that of the formal financial system. as 149 000 new SHGs took up loans in 2000-2001. Groups need not be involved in all of the above functions. The group may also engage in joint income generating activities. The Indian government aims at providing by 2008 credit through the formal financial system to one million SHGs by (Harper. Sometimes savings in kind are observed as well. On average. This amounts to almost three million clients in one year. like the obligatory announcement of credit use by the individual SHG member. We refer to Verhelle (2001) for a detailed overview. This vigorous promotion by the Indian government8 and the collaboration between the banks. 2002). but undercuts the interest rate charged by local moneylenders.
This branch we contacted currently supports seventeen groups. 2002).9 and 1 100 Rs. Well over 95% of the SHG loans are repaid on time. 11 . However there are different sources for funding the NGOs' activities. may be used as a revolving fund. by making sure that the government schemes are implemented correctly and that benefits accrue to the right people and finally. these groups are also eligible for formal bank credit through the SGSY-scheme10. another loan up to 125 000 Rs. 10 Upon the positive appraisal of the group’s savings and intra-group credit performance by the block officer and bank manager. The Self Help Groups are 9 The average exchange rate during the period of field study (Jan. approximately 35 km from Raipur. by supporting the formation of Self Help Groups.-April 2003) amounted to 51. by foreign donor agencies (PRERAK and MSKPP) or by the joint IFADWorld Bank-Indian government scheme (Grihini’s Swa Shakti groups).868 Rs. The branch of this small NGO we visited has only two permanent staff members. may be sanctioned. The subsequent loan amount even increases further. The average loan per SHG and per member stood respectively at 18 000 Rs. Following timely repayment./€. She is involved in SHG activities since 1992. thirty groups have been promoted during the last three years. Of the seventy villages covered by this NGO. This credit is disbursed by a commercial bank. of which 10 000 Rs. Repayment of the SGSY-credit is due after one year. Chingari Mahila Samiti attempts to achieve this by encouraging women to attend village assemblies. the branch we contacted covers twenty. In principle. The promotion of the other groups is either funded by the NGOs themselves (Chingari Mahila Samiti). these figures mean that about four and a half million people in India have access to formal savings and credit facilities through their SHG membership. It is located in Mandir Hasoud. The NGO promoted 65 groups till date.5 to 14% interest is charged per annum on the remaining loan amount. SECTION 4 THE PROMOTING NGOs All NGOs visited during our field study promote the Self Help Group approach. The main objective of this NGO is empowerment of women.By April 2001 approximately 285 000 SHGs had taken loans from 41 Indian commercial banks. while 13. who completed herself only lower primary education. Ms Sita Devi is a dynamic lady. but instalments are flexible. In this section we take a closer look at the functioning and objectives of these four NGOs. Chingari Mahila Samiti was founded by Ms Sita Devi and six other women. 166 regional rural banks and 111 co-operative banks (Harper. the capital of Chhatisgarh. It has stopped its support of thirteen groups. the group may be accorded a loan up to 25 000 Rs. which are now working independently. Half of the groups interviewed are promoted with the help of funds provided by the government-run SGSY-scheme. No interest is paid on the revolving fund amount. With an average membership of seventeen people per SHG.
The two branches of the rather recently established NGO PRERAK (“motivator”) operate with 18 staff members in 50 villages. Chingari Mahila Samiti encourages the SHGs it supports to undertake income generating activities like goat rearing. Till date only a few women received this compensation. MSKPP employs 21 fieldworkers. The seven fieldworkers of the branch we visited in Gariaband. it promoted approximately 300 groups of which sixty are now working independently. It covers approximately 200 villages in four blocks. several groups separately sold their collected Mahua flower. pig and goat rearing. At the end of 2002 thirty SHGs formed a In 1998 the women of several SHGs manifested against the males’ alcohol abuse in Mandir Hasoud. This led a split in some groups. Many groups undertake joint income generating activities (mahua collection14. All forty women of the village Parsoelie joined the group and initially contributed half a Rupee per month12. 14 The Mahua flower is found in the forest from March to May and is used as an ingredient in liquor. paddy trade). the main focus of the SHGs is social and political upliftment11. which seems to have harmed the groups’ performance. PRERAK provides linkages with the market. approximately 150 km from the state capital Raipur. Nevertheless. to each group. Five years ago. In 2002 one hundred groups established their own federation. 11 12 . PRERAK gives a grant of 1000 Rs. group farming and selling of spices. Later on they collaborated in order to obtain a more favourable price. PRERAK pursues the social upliftment of tribal and landless people by striving for the recognition of their land rights. work in the surrounding jungle area. by raising people's awareness. One third of the groups opened a savings account at a the bank. Another example of the political commitment of the groups is the case of one group interviewed that is fighting against the government to obtain recognition of land ownership rights. The federation provides credit facilities to the affiliated groups without imposing interest rate charges or fixed repayment installments. After finding no support from the legislative authorities they went on a hunger strike and in the end were promised compensation to be able to reconstruct their houses. Since its involvement in SHG activities in 1995-1996. 13 The increased focus of PRERAK to link the groups with the SGSY program led to the forced split of several groups. Hence. Many angry family members of the SHG members subsequently prohibited them from participating in the group activities. Besides. The Bilaspur-based NGO MSKPP places a strong emphasis on women empowerment. by providing irrigation facilities and by facilitating income generating activities. PRERAK formed its first SHG. It is trying to get the groups registered under the SGSY program13.mainly used as a political platform to address injustices and malpractices at the village level. All SHG leaders receive management and record keeping training. but none of the groups obtained bank credit. Several groups are registered under the SGSY scheme and about fifty groups obtained SGSY-credit. The sarpanch (mayor) reacted by destroying the NGO office and the houses of the women who demonstrated. PRERAK so far promoted 150 predominantly female groups. 12 In the meantime (three years ago) the group split into three smaller groups in order to be eligible for the SGSY registration and credit. Initially. most of these members rejoined a SHG later on.
These NGOs operate in Raipur or Bilaspur district. Hence few groups work independently. an NGO which employs 16 people. some quarrels had arisen due to the different treatment regarding outside credit. Upon termination of the Swa Shakti program next year. No income generating activities are undertaken at the group level. But Swa Shakti groups seem to generate positive externalities as their existence inspired other villagers to form a group. Since December 2001 forty Self Help Groups have been promoted under the World Bank’s Swa Shakti program. SECTION 5 THE DATA We begin this section with a brief description of the data collection and of some relevant group characteristics. two clusters each comprising five to six Swa Shakti groups started their operations16. the demand for this kind of activities is present.1 Data Collection and Preliminary Data Analysis The data used in this paper were obtained first-hand during the first months of 2003 through a survey of 63 Self Help Groups. At the time the fieldwork was undertaken. the NGO will attempt to link the groups directly with a bank. while the Swa Shakti groups are more socially oriented. Group interviews were carried out by one of the authors in cooperation with the four NGOs described in the previous section. 13 . both in the newly formed state Chhatisgarh17 . 16 In the near future. The main difference between both schemes is the credit orientation of the SGSY groups. The primary objective of Grihini15. 5. One third of the 15 Grihini was founded by a Hirmi-based cement factory belonging to the Danish multinational L&T. The Swa Shakti groups receive training on health-related and miscellaneous other issues. Grihini is planning to form another five clusters. Most groups interviewed seem to be highly credit-oriented. is rural women’s empowerment through SHGs. but especially the Swa Shakti groups are participating in village development activities. Eight groups obtained credit under the SGSY scheme. In the meantime they also formed 106 groups under the SGSY scheme. However. Hardly any income generating activities are undertaken at the group level due to a lack of expertise in establishing market linkages and in accessing the necessary inputs. Grihini closely monitors the groups by attending the monthly meetings and keeping the records. We then describe the variables measuring SHGs’ performance and the potential determinants of performance.cluster. 17 Until November 2000 the area which now forms Chhatisgarh was part of the central Indian state Madhya Pradesh. The existence of SGSY and Swa Shakti groups in the same village seems to exert a negative impact on the Swa Shakti groups.
2001). For 89% of the members agriculture was the main occupation. Unlike some of the empirical studies mentioned in section 2. All data were cross-checked with the information obtained from the NGO fieldworkers and NGO records. At the same time. 1985 in Verhelle. Seven percent of them had joined the group after its creation. The majority of the group members (57%) were illiterate. the so called neo-literates. Almost one quarter of the groups was changing its leadership in the course of time. On average a group had 13 members. 35% of the members did not own any land. tribes and other parts of the population are referred to as ‘Scheduled Caste (SC)’.groups interviewed were promoted by the two smaller NGOs Chingari Mahila Samiti and PRERAK (ten groups each). the remaining 48 NGOs were supported by the other two NGOs. we conducted the interviews with as many group members as possible in order to prevent the bias implicit in information obtained from just one person. On average two members had dropped out. Nineteen percent could read and write their names. An average SHG member’s household consisted of six people. while more than half of the group members (55%) belonged to the Other Backward Casts (OBC)18. A minority.2. They were accorded certain privileges such as job reservation in government employment (Vidyarthi and Rai. ranging from one month to seven years. On average. 1950 certain underdeveloped castes. We interviewed a representative sample of groups from the two distinct group schemes SGSY and Swa Shakti implemented by Grihini. Twelve percent of the members were widows and 4% were either single or divorced/abandoned. With the help of NGO fieldworkers and a map of the respective areas of operation. this allowed us to observe the group interaction. while 7% migrated to find work. Only one (urban) group had four men among its twenty members. All other groups had an exclusive female membership. Within each village we randomly selected the groups to be interviewed. Seven percent of the SHG members lived in the same household as another member of the same group. we randomly selected interior villages and villages along main roads. neo-literate. 18 In the Indian Constitution of January 26. belonged to the upper/other castes. On average a group had as many Scheduled Caste (SC) (22%) as Scheduled Tribe (ST) members (20%). Of the 52 groups for which we obtained data on landholdings. usually the group leader. On average an SHG leader was 38 years old. Thus the percentage of members who had received some formal schooling was somewhat less than one quarter. a groups had existed for 23 months. In 26% of the groups he belonged to the household of an important villager. The average age of a group member was 37 years. on average 3%. ‘Scheduled Tribe (ST)’ and ‘Other Backward Casts (OBC)’. 14 . the average age range was 27 years.
. Excluding the latter groups raised the average cash holdings to 954 Rs. 6400 Rs. of savings in its bank account. The average total of loans ever given to members and non-members was 9671 Rs. 5. Thirdly. and 3600 Rs. The average amount of outside credit of a group was 3302 Rs. Unlike many group-lending schemes. But in India Self Help Groups conduct several activities. Almost half of the groups interviewed belonged to the SGSY-scheme and fourteen percent were formed under the Swa Shakti program. In the groups undertaking such activities on average twelve intra-group loans had been given. 15% for festivals and social activities. a group holds 2644 Rs. the average was 13000 Rs. the average value of these savings was 2100 Rs. Only three PRERAK groups saved in kind. In the SHG-context savings constitute the core activity. Ten groups dido not undertake intra-group credit activities. Sixteen percent of the groups encountered some opposition from villagers or family members. Although this could harness and strengthen the group cohesion. while for others it took 3 months to be started up. We can distinguish five different categories. in cash and 100 Rs. In addition. implying that on average a loan of 662 Rs. But for the 16 groups with outside credit. 409 Rs. Half of the intra-group loans were used for household expenditures. Measurement of SHGs’ performance Worldwide micro-credit groups are mainly formed in order to obtain outside credit. the Indian SHG scheme thus primarily relies on the savings of its members to satisfy their credit needs. a group can apply for outside credit. 13% for business purposes and the remaining 2% for miscellaneous expenses. Intra-group credit activity was on average started one year after the start up of the group’s.. Four groups did not a bank account.). 15 . some groups already came into existence after one day. Once the savings fund of a group is thought to be large enough or in case some members are faced with urgent credit needs. failure or disputes arising from the distribution of profits from these activities can 19 This is defined as the number of days in between the day they were informed about the SHGconcept or contacted by a fieldworker and the day they made their first savings contribution. while thirty-six groups did not have cash holdings. the group can decide to start up intra-group lending. many SHGs also undertake joint income generating activities in order to increase the group’s savings fund or to raise their members' income. This is the only SHG activity which has been extensively documented and analysed as it is the SHG equivalent of the group-lending aspect prevalent in other micro-credit systems. Ten groups provided group loans to non-members. The joint liability aspect of group-lending contracts facilitates the access to outside credit for group members. one fifth for agriculture. in kind (ranging from zero to respectively 33 000 Rs. these amounted to 30% of the total amount of loans given by these groups.2. On average.On average it took 25 days for a group to be formed19. Over the whole sample only 6% of the total amount of loans given by SHGs were awarded to non-members.
measured by actual savings over planned savings. We capture a group’s performance with respect to the intra-group lending activity by three variables. Our third measure of intra-group credit performance is the percentage of members who ever accessed credit from the group. This measure captures the outreach of the intra-group credit activity. Multiplying the savings contribution by its monthly frequency. First. According to this measure on average 15% of the intra-group loans is in arrears. In this subsection we discuss the variables measuring the SHGs’ performance. including community development activities.e. Lastly. of credit taken and one month extra for every 100 Rs. we use the proportion of the intra-group loan amount in arrears. but is of higher importance to women as they often lack the required social status to undertake these activities on their own. As can be seen in table 1 the SHGs in our sample had saved on average only 72% of the amount agreed upon. Self Help Group can be used as a platform through which Indian women jointly can undertake social activities. Unlike the empirical studies mentioned in section 2. adjusted for intra-group loans. The first variable investigated is the savings performance. Each group initially decides upon the amount and the frequency of savings contributions. This encompass a whole range of activities. This is also true for male groups. Most groups are very flexible with respect to intra-group loan repayments and do not impose a strict repayment schedule. We call this the incidence of internal loan delinquency. but also its performance with respect to the other four undertakings. its cash holdings and the balance on its bank account. the availability and use of social services. Comparing this amount with the group' actual savings. gives us an indication of the group’s savings discipline. we use a dummy equal to one if at least one intra-group loan is in arrears as measured by the above criteria. This seemed to be a not too strict repayment schedule. raising awareness on (discriminating) traditional customs or practices. According to his measure almost half (47%) of the groups involved in intra-group credit are confronted with some repayment problem.have an enormous detrimental impact upon a group. the number of members and the number of months since inception (taking into account changes in the savings contribution and drop outs) gives us the amount the group should have saved at the time the interview was conducted. exceeding 200 Rs. Secondly. nonrepaid outside loans and profits from income generating activities. in the next subsection we turn to the description of potential determinants of performance. We ‘impose’ the following schedule: repayment after three months for the first 200 Rs. i.2 we therefore not only analyse the SHG’s outside credit performance. We can hardly claim a group to perform well with respect to intra-group credit activity if 16 . Such activities may be the subject of discussions or of actions taken against social injustices.
This suggests that on average intra-group credit is quite accessible to group members. discussing roles and decision-making of women and men in the household. On average sixty one percent of the outside credit had been repaid on time by these groups. although the performance of groups on each of these distinct features may provide us with useful insights. health care or effectiveness of water provision).e.37 income generating activities. This number is obtained as the sum of positive answers on the following questions: ‘Is the group undertaking community development activities. discussing traditional customs or practices like the age of marriage or giving dowry. The first is the ratio of outside credit to the actual group savings. Only 20 of the 63 SHGs in our sample undertook one or more income generating activities. This technique involves the application of weights which are specific for each observation. discussing family problems. So far on average 44% of a group’s members have obtained a credit.e. almost two social issues were either discussed or action was taken to remedy them.g. taking action against social discrimination?’ On average. i. the repayment schedule for outside credit is stipulated in advance. As a performance measure for income generating activities we use the number of income generating activities undertaken by a group. In contrast to the intra-group loans. or approximately one activity per three groups. For the subsample of the 16 groups which had obtained outside credit. In the same way we measure the group’s performance with respect to social activities by the number of social activities undertaken. education. discussing the availability and use of social services (e. Finally. Table 1 shows that on average a SHG undertook as few as 0. We opted for the use of a technique of unequal weighting. the synthetic indicator of the performance proposed by Melyn and Moesen (1991). i. an index of global performance may be interesting.credit is only available for one or two members.7 times the actual group savings. On average outside credit was equal to 1. in such a way that the outcome is most 17 . we therefore also use a second indicator of outside credit performance. in our case each SHG. This small number is due to the large number of SHGs who are not involved in such activities. Only four groups did not undertake any of the above mentioned activities. For the subsample of sixteen groups which so far had obtained an outside credit the ratio was on average equal to six. the percentage of credit repaid on time. This provides an indication of the access to outside credit and of its order of magnitude. As to outside credit we use two measures. even if these repay their loans on time. particularly for girls.
and finally whether the group reports at most 5% of the members differing in their land holdings from the other members. whether all members belong to the same caste or two castes at most with members of one caste representing at most 10% of the group. while SHGPI 5 incorporates two measures of intra-group lending and excludes outside credit20 . whether the group reports at most 10% of the members exercising some other kind of income earning activity or occupation than the other group members. These variables will be used as explanatory variables in the regressions discussed in section 6. because it is apparent from own observation that much of the screening of members actually occurs ex after a group has been formed. See also Wydick (2001).favourable for the observation. Our measure consists of the sum of scores (1 for each positive answer. whether the group explicitly reports people have been refused to join. In a segmented society like the Indian one. The first potential determinant is the degree of self-selection within a group. The lack of adequate information about the true objectives of each group induces this benefit of the doubt weighting. It boils down to the solution of a linear programming problem with constraints on weights. we turn to the potential determinants of performance. the different objectives pursued by a SHG can be incorporated into the performance indicator. 20 In Verhelle (2003) some other SHGPI were used on which the following econometric analysis is based. In this way. age. 5. 0 otherwise) on the following questions: whether the age range within the group is smaller than or equal to 15 years. To measure social homogeneity we consider six characteristics. it is indeed conceivable that persons with a homogeneous background have better information on each other. marital status.e. 21 We use a broad measure of self-selection. Description of potential determinants of performance Next. We measure this by the sum (1 for each positive answer) of whether the group reports it self selected. whether all members attained the same educational status or two distinct ones with members of one educational status representing at most 10% of the group. They are shown in table 2. education. occupation and land holdings of the group members. caste.3. 18 . On average. See table A1 in the Appendix for the description of the other SHGPI. As shown by table 1 the performance indictor SHGPI 3 encompasses performance indicators of four distinct categories. i. whether all members are homogenous in marital status or have at most two distinct marital statuses with members of one marital status representing less than 10% of the group. The second determinant we consider is social homogeneity. the group members have in between two and three of those characteristics in common. including ex ante and ex post self-selection. whether members dropped out (except in case of death or permanent migration) and whether new members joined later21.
bank.Next we consider peer monitoring.e. This variable is again measured by a dummy equal to one for SHGs which belong to the SGSY scheme and zero otherwise. On the other hand. i. This is measured by a dummy equal to one if the group states that they are willing to exert pressure on a member who is not living up to her obligations. The fourth potential determinant of group performance is group solidarity or intra-group insurance. In almost half of the groups interviewed we observed the existence of some kind of intra-group insurance. The first control variable is measured by the mean distance in kilometres of the SHG’s meeting place from ten basic infrastructure services. As a proxy for this variable we use the frequency of group meetings. As explained in section 4 the SGSY-scheme’s distinctive feature is the promise made at the group’s start of provision of outside credit upon excellent savings and intra-group credit performance. Most groups meet once or twice a month. e. kindergarten. Fifth we consider group pressure. The inclusion of several microfinance schemes within our data set gives us the possibility.g. a higher proportion of below poverty line members. 19 . to estimate the efficacy of a particular program feature like this dynamic incentive of promised access to increasingly larger outside credit. These are remoteness from basic infrastructure services and the number of SHGs in the village. the nearest health centre. Many groups report paying jointly a member’s periodical saving contribution or providing some rice or other food item in case a member is affeced by an emergency. we should keep in mind that groups belonging to the SGSY-scheme may also share other distinguishing features. Upon approval of its first loan application an SHG under the scheme can obtain a first bank loan of up to 25 000 Rs. Later loans can consist of even higher amounts. Finally two control variables are added to the analysis. not available in other empirical studies. Of the 63 groups interviewed 30 belong to the SGSY-scheme. We measure this variable by a dummy equal to one if the group members state that they help one another in times of need in other ways than through giving the needy member an intra-group loan. If this is repaid on schedule a second loan can be obtained for up to 125 000 Rs. This frequency promotes an SHG’s monitoring ability and activity. primary school. The dynamic incentive of promised access to progressively larger outside credit is our sixth potential determinant of performance. Less than half of the sample SHGs (38%) expressed their willingness to exert peer pressure.
the number of social activities undertaken and most general performance indicators. these are thought to be the optimal environment to use dynamic incentives in micro finance programs (see among others Morduch. In the case of intra-group loan 20 . others point to enforcement and collusion problems in the presence of social ties between members. high school. Nevertheless. Therefore the sign of the effect of social ties on group performance is not a priori clear. of the effect of the remoteness variable cannot a priori be defined. Again the sign The coefficient of the interaction term of the SGSY-dummy. market. but it could negatively affect group cohesion and investment choice. however. On average three SHGs operate in a sample village. Peer pressure is expected to have a positive effect on enforcement of obligations. and the basic infrastructure index shows the effect of this dynamic incentive in remote villages. Therefore again the sign of its effect on group performance is not a priori clear. But we will also test for the existence and sign of their effects on the group’s income generating and social activities. Remoteness from basic infrastructure services is expected to work against group performance. 22 22 . The expectations regarding the sign of the effects of potential determinants apply directly to the performance on group savings. Besides in remote villages people usually lack access to services like banks and primary health care. because of the absence of alternative financial services and the limited mobility of people living in remote areas. positive correlation of the SGSY-basic infrastructure index interaction term with intra-group loan repayment. For our sample SHGs the average mean distance is 3. We now discuss the expected sign of the effect the potential determinants may have on the performance indicators.middle school. 1999). panchayat. At first sight. resulting in poorer group performance. representing the dynamic incentive of a promised stream of increasingly larger loans. The estimates are tentative of significant. The same remark apply to peer monitoring. group solidarity and the dynamic incentive of promised increasing outside credit to have an unambiguous positive effect on the performance indicators. the number of income generating activities undertaken. Although some authors argue that social ties have a positive impact on group performance. intra-group credit and outside credit. the results seem to support the hypothesis of a more positive impact of a promised sequence of progressively larger formal loans in interior villages. outside credit performance. fair price shop and bus stand. On the basis of the theoretical literature we expect self-selection. We do not report the results here as the inclusion of this interaction term brings along a multicollinearity problem. This is not surprising given our limited number of observations.5 kilometres. Scarce resources are diverted to cover the inherently higher transportation costs and fewer investment and market opportunities are available. The second control variable measures possible external effects that SHGs may have on other SHGs in the same village.
Before turning to the regression results. 24 Numeric results. row three of table three. We test for the existence of a link between each of the eight individual performance indicators and the potential determinants we described in the previous section. The negative sign means that there exists the existence of social ties is associated with a lower percentage of members who have had access to intra-group loans. can be found in tables A2 to A7 in appendix. Therefore selection bias in the estimators constitutes a problem which we are unable to accommodate. In this table we mention only the sign of the links (absence of sign implies a positive link) and its statistical significance.Many authors postulate a negative impact of increased competition in micro finance on a group’s performance. Another potential source of sample selection bias. Consider e. with inclusion of the selection part of the equations and results for the other SHGPI.g.1 Regression results: first approach. SECTION 6 ECONOMETRIC ANALYSIS OF DETERMINANTS OF SUCCESS Next we turn to the regression analysis. namely the fact that groups choose on the basis of certain characteristics or factors whether or not to undertake all or some of the five activities mentioned in section 5. the negative effect of the promise of outside credit on the percentage loans too long outstanding is larger in remote areas. and for the sign of the link23. we note that it is not possible to extend our results beyond the groups observed. incentives weaken and the sustainability of the groups is at stake. within the same village. 23 This section gives a concise overview of the econometric analysis in Verhelle (2003). The regression results are given in table 324. biases and impact of potential determinants can be found in Verhelle (2003). We check for this by examining the effect of the number of SHGs. The triple star means that the probability that this link is not systematic and due to chance only is less than 1%. the cell in column four. 6. gender and limited landholdings.2 has been taken care off by using an appropriate estimation technique. Indeed selection into the Self Help Group scheme is probably non-random. but based on characteristics such as below poverty line status. A single and double star mean that the repayment for instance. 21 . If drop-outs can easily get credit or other micro financial services under another scheme. regardless of the scheme they belong to. suggesting that groups living in remote areas have a higher loan fraction in arrears. Full details on estimation techniques. Besides the coefficient on the basic infrastructure index remains highly statistically significant and positive.
e.5. 2. It is associated with a better repayment performance for intra-group credit and with higher outside credit obtained. Observe also that there is no statistical evidence of a link of this variable with the overall performance indicator. proxied by the frequency of meetings. all models seem to have some explanatory power. We see no easy explanation for this negative link. But it is associated with higher access of members to intragroup credit and of the group to outside credit. 3. A tentative explanation could be that the SHGs under the SGSYscheme perceive the scheme as temporary only. but peer pressure has a negative bearing on the probability of intra-group loans in arrears. The Wald test statistic of these models exceeds the critical value of 15. As the table shows the results we obtain for the different performance measures are quite diverse. 4. the distance to infrastructure services and the existence of several SHGs in the village. i. Both control variables. Except for one of the regressions capturing the group’s outside credit performance. Monitoring affects savings positively. It is also associated with higher values of the synthetic group performance indicators. The dynamic incentive of promised access to increasingly larger outside credit also is a decisive determinant of group performance. peer monitoring. But we have no evidence to support this hypothesis. Group solidarity (or intra-group insurance) seems crucial in driving the results. and peer pressure play only a limited role in explaining group performance. 1. But it is negatively linked with the outside repayment of outside credit. It has a statistically significant negative impact on group savings. The latter is contrary to what was a priori expected. Social ties are found to have detrimental effects on the group’s performance. It is positively associated with group savings. are associated with several performance indicators in a 22 . We first consider the six financial performance indicators as well as the two synthetic indicators. which could be the result of the reliance on intra-group solidarity. Therefore we can reject the null hypothesis that all coefficients except the constant term are equal to zero. 6. They raise the probability of intra-group loan arrears and the arrears on outside credit and they are negatively associated with overall performance.statistical significance of a link is established at respectively the 5% and 10% confidence levels. but it raises the probability of arrears. 5. Self-selection has only a limited effect on financial performance. Compared to the other group characteristics.
called instrumental variables26. Social activities are negatively associated with social ties and positively with intra-group insurance. and the SGSYdummy may be affected by the same random factors as those affecting the SHGs’ performance. we have no easy explanation for this negative link. More specifically. the presence of other SHGs in a village has predominantly positive effects.4. We now turn to the two remaining performance indicators. intra-group insurance and the dynamic incentive of a promised progressively larger stream of outside credit play a crucial role in determining the group’s performance. the percentage of young female divorced or abandoned members living in an 23 . we refer to section IV.1 may be biased due to endogeneity. Finally. SHGs in remote villages and the presence of other SHGs seem to stimulate IGAs. Overall. These findings are in line with the theoretical presumptions of the difficult working environment of groups in remote areas hampering in general their performance.statistically significant way. Table 4 gives the revised empirical results when IV-estimation is used to correct for possible endogeneity27. but enhancing their performance with respect to outside credit repayment due to the threat of being cut off from future outside credit upon default. 25 For a more thorough explanation of the endogeneity issue. the variables for group solidarity and peer pressure. in Verhelle (2003). Besides the remoteness and externalities from the presence of other SHGs in the village also determine SHGs’ succes. 6. except for performance on intra-group credit repayment. The latter is obtained by using regression equations in which those explanatory variables are regressed on a number of new variables. The former are positively associated with self-selection and by frequency of meetings and negatively with intra-group insurance and the promise of progressively increasing outside credit.2 Regression results: second approach The results presented in section 6. social ties. We statistically correct for this problem by using instrumental variables (IV) estimation. income generating activities and social activities. Again. This may result in biased estimates25. The regression results indicate that SHGs remote from basic infrastructure perform worse than other SHGs except for their outside credit repayment performance. the frequency of meetings. But some of the negative associations are difficult to explain. 26 The following variables are used as instruments for the monitoring variable: the percentage of new members. This means that we replace the actual value of those explanatory variables by the their estimated value.
together with the selection part of the equations can be found in tables A5 to A7 in appendix. 24 . See Verhelle (2003) for full details. 27 The revised results.extended family. based on IV-estimation. the duration of meetings and a dummy equal to one if 90 percent or more of the population of a village belongs to one particular caste.
25 .28 The instruments diyextf and hocavil both take on the value 0 in the 16 and 11 observations respectively.
self-selection only exerts a small positive effect. in the sense of groups with a particular group characteristic being also more likely to possess another group characteristic. The number of SHGs in a village appears to have a strong effect on group performance. 26 . urging for caution in the interpretation of the empirical analyses found in the literature so far. 1. remoteness and other SHGs in the village. Self-selection and peer monitoring play only a limited role. Hence. the conclusions concerning the crucial role played by the dynamic incentive of promised outside credit and the control variables. 3. but predominantly negative effect. 3. are unchanged. It is Peer pressure also not detrimental to intra-group credit repayment anymore. exclusively affects the group performance in a positive way and gains a lot of importance. increasingly larger outside credit and remoteness remain crucial and their results are still parallel but with opposite signs. Hence. 29 The regression results suggest that there is matching (endogeneity). 2. 4. The promise of outside credit is still the only group characteristic beneficial to the intra-group credit repayment. it does not seem to play a crucial role in explaining group performance. The dynamic incentive of promised. The existence of other SHGs in the village appears to inflict predominantly negative externalities upon the group’s performance. with monitoring exerting positive effects only. Although group solidarity may affect group performance in a positive way. The major differences with the previous analysis can be summarized as follows: 1. peer pressure emerges as an important factor underlying successful group performance. Social ties are less important in determining a group’s performance and have an ambiguous. Controlling for this endogeneity rather seriously affects the conclusions. After instrumentation. 2. while the decisive role of social ties and group solidarity in determining group performance has vanished.With respect to our previous results few conclusions remain29.
We find strong and robust evidence that the promise of progressively larger outside credit has a positive impact on group performance. The most popular alternative has been microfinance. none of the empirical studies hitherto specifically accommodates the endogeneity problem.SECTION 7 CONCLUSION Rural financial markets in developing countries face three major problems: adverse selection. which could render the estimates inconsistent. The vast majority attributed the success of microfinance to its innovative group-lending and joint-liability component. So far empirical analysis to quantify the roles of these overlapping and competing mechanisms is scant. Third. Joint-liability was heralded as the driving force behind self-selection alleviating the adverse selection problem. an overwhelming number of theoretical models arose to explain the extraordinary repayment performance of microcredit groups. Recently. This paper takes a useful first step in that direction. unlike previous empirical studies we are able to apportion the effect of promised increasingly larger outside credit cum credit denial. and the imposition and use of social sanctions and group solidarity circumventing the enforcement problem. formal lenders discriminate against small borrowers because of the high cost of information acquisition and their weak enforcement capacity. This has led to the search for alternative financial service delivery systems for poor borrowers all over the developing world. Second. First. Among these. This paper contributes to this empirical literature by providing evidence on determinants of microfinance group performance in India. In recent years. As this mechanism is not necessarily group based (although it is in our data set). this may provide support for the 27 . Under the imperfect information paradigm. moral hazard and enforcement. emphasis was laid on the use of a stream of progressively bigger loans combined with denial of new credit in case of default. given the huge amount of resources being pledged to support for microfinance and the scarce empirical evidence of the determinants of microfinance performance. We therefore believe the contribution of this paper to be threefold. Due to data problems the impact of this dynamic incentive could not investigated by other studies. the need for empirical testing of the theoretical propositions has been felt by many authors. the use of inside information through harnessing social ties and peer monitoring deterring moral hazard. some economic theorists point to the importance of other innovations like dynamic incentives.
which at first seemed to be the crucial determinant of a group’s success. In addition. while the existence of other Self Help Groups in the same village seems to bear a negative impact on the groups’ performance. Group solidarity. Communities characterized by low competition in financial services and low mobility may indeed be thought to be sensitive to a scheme of progressive lending cum credit denial upon default. This evidence is further strengthened by the finding of a more powerful effect of the nonrefinancing threat in remote villages. Thus one should be careful with the interpretation of the uninstrumented estimation results. Peer pressure within these groups affects group performance positively as well. when endogeneity is taken into account. our results are suggestive of the importance of promising progressively larger outside credit and threatening with credit denial upon default as a driving force behind group performance of the 63 Chhattisgarhi groups surveyed. Peer pressure first only seemed to play a secondary and supporting role compared to intra-group insurance. does not appear to be important either. controlling for endogeneity suggests a negative impact. as expected. accomodating the endogeneity problem seems to alter the results quite substantially. Checking for endogeneity. 28 . but correcting for endogeneous matching shows its importance as a driving force behind the group’s performance. groups located at some distance from a main road seem to perform worse in their other undertakings. a highly significant positive effect of peer pressure on the group’s performance is evident.view that there is more to microfinance than group lending and joint liability. In brief. Hence. Furthermore. social ties do not seem to play a crucial role in determining group performance. Although we initially found evidence of predominantly positive externalities of the existence of other Self Help Groups in the same village. these mechanisms hardly seem effective in our data set. In sharp contrast to the enormous amount of theoretical models attributing the success of microfinance to self-selection and peer monitoring.
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16 .r.50 . . % intra-group loans in arrears. education.25 2.15 63 63 61 1.28 .82 1.48 .37 . marital status.49 63 63 63 .50 3.Table 1: Descriptive statistics of variables measuring SHGs’ performance Variable Abbreviation: Savperf Outsdttl Obs Mean 63 53 53 63 61 16 63 63 53 . % members received credit and social activities SOURCE: Verhelle (2003) 53 .36 .10 Table 2: Descriptive statistics of potential determinants of performance Variable Explanatory variables: Self-selection Selfselm Social ties Homog Peer monitoring Freqmeet Group solidarity ingrins Group pressure peerpr Dynamic incentives sgsy Control variables infrstkm Obs Mean St. % members received credit.46 .38 .28 mean distance (km) from basic infrastructure services vilnrshg n° of SHGs in the village SOURCE: Verhelle (2003) 32 . age.58 .43 1.37 1.48 3.66 . proportion outside credit taken and social activities SHGPI 5 SHG Performance Index composed of savings.11 actual savings / planned savings intra-group loan amount in arrears / total intragroup loan amount Intlodel incidence of internal loan delinquency Membcre % of members received credit Outcred amount of outside credit / actual savings Ocoutsrep % outside credit repaid at due date Igamm n° of IGA undertaken by SHG Socactmn n° of social activities undertaken by SHG SHGPI 3 SHG Performance Index composed of savings.36 7.61 .05 . caste.44 1.81 .34 . Dev.55 St.42 3. Dev. degree of self-selection homogeneity w.75 . occupation and land ownership frequency of meeting (n° of times per month) dummy = 1 if provision of intra-group insurance dummy = 1 if group shows willingness to exert peer pressure dummy = 1 if group belongs to SGSY scheme 63 63 1.72 .58 1.65 .47 .t.15 .50 .
5% and 10% of the studies we would encounter a zero impact.3486) -74.186 *** 53 63.889 *** 61 40.43 (0. This means that in case the study would be repeated in less than respectively 1%.19 (0. ** and * respectively.700 (-)* *** *** 61 60.92 (0.685 61 16.32 (0.031 61 61.83 0.643 ** (-)** (-)*** *** (-)*** *** ** 61 58. Statistical significance at 1.0016) -11.0046) -48.0000) -37.0000) 56.0000) 51.93 (0.15 (0. 34 .465 53 39.005 61 8.0000) 1.15 (0.32 (0.673 (-)*** * ** * Savings % intragroup loans in arrears (Heckman ML) Incidence of internal loan delinquency % members accessed intra-group credit (Tobit) % outside credit to savings % outside credit repaid on time (Heckman ML) N° of IGA N° of social activities SHGPI 3 SHGPI 5 (Probit) * (Tobit) (Heckman ML) *** (Ordered Logit) (Tobit) (Tobit) (-)*** (-)* ** (-)** (-)* (-)* * *** ** Standard errors are in parentheses.0000 -11.0000) -1.888 ** (-)** ** (-)*** *** *** 53 24.0380) -81.68 (0. 5 and 10% significance level denoted by ***.Table 3: Regression analysis of potential determinants on SHGs’ performance Variables measuring SHGs’ performance: (Tobit) Self-selection Social ties Peer monitoring Intra-group insurance Peer pressure Promised outside credit Remoteness Externalities Obs (n°) Wald χ² (Prob) Log likelihood ** 61 22.
9263) 16 0.09 *** *** 52 6.22 52 4.82 (0. 5% and 10% of the studies we would encounter a zero impact.0002) 0. peer pressure (peerpr) and dynamic incentive (sgsy) variables are instrumented. the natural logarithm of the number of months of the group’s existence (durmeet) and a dummy = 1 if the village is homogeneous in caste (hocavil). 35 . group solidarity (ingrins). This means that in case the study would be repeated in less than respectively 1%.0468) (-)*** *** ** 52 4.32 (0.Table 4: IV regression analysis of potential determinants on SHGs’ performance Variables measuring SHGs’ performance: Self-selection Social ties Peer monitoring Intra-group insurance Peer pressure Promised outside credit Remoteness Externalities Obs (n°) F stat (Prob) R² 60 1. ** and * respectively.2559) 0.24 ** 60 4.0000) 0.57 (0.26 * Savings % intragroup loans in arrears Incidence of internal loan delinquency % members accessed igcredit % outside credit to savings % outside credit repaid on time N° of IGA N° of social activities SHGPI 3 SHGPI 5 *** ** *** ** * ** * (-)*** * Standard errors are in parentheses.0007) 0.0013) 0.38 (0. the % divorced or abandoned young group members living in an extended family (diyextf).0008) 60 2. The monitoring (freqmeet).0000) 0.17 (0. 5 and 10% significance level denoted by ***.97 (0.12 (0.20 60 0.05 (0.48 (-)*** *** ** 52 6.15 (0. Instruments are the percentage members joined later (membnew).66 18 10. Statistical significance at 1.
IGA and social activities performance Table A7: IV regression analysis of potential determinants on the constructed SHG Performance Indices 36 .APPENDIX Table A1: Summary statistics of all variables used in the regression analyses Table A2: Regression analysis of potential determinants on groups’ savings and intra-group credit performance Table A3: Regression analysis of potential determinants on groups’ outside credit. income generating and social activities performance Table A4: Regression analysis of potential determinants on constructed Self Help Group Performance Indices Table A5: IV regression analysis of potential determinants on groups’ savings and intragroup credit performance Table A6: IV regression analysis of potential determinants on groups’ outside credit.
% members received credit and social activities 63 53 53 63 61 16 63 63 53 .48 .70 . % intra-group loans in arrears.50 .15 .37 .38 .15 63 63 61 1.36 7.25 2.28 *Note: SHGPI 3 is equal to SHGPI 1 in the text. caste.50 .Table A1: Summary statistics of all variables used in the regression analyses Variable Dependent variables: savperf outsdttl intlodel membcre outcred ocoutsrep igamm socactmn SHGPI 1 Obs Mean actual savings / planned savings intra-group loan amount in arrears / total intragroup loan amount incidence of internal loan delinquency % of members received credit amount of outside credit / actual savings % outside credit repaid at due date n° of IGA undertaken by SHG n° of social activities undertaken by SHG SHG Performance Index composed of savings.58 .74 .50 3.61 .r.72 .34 .28 .42 3.55 . 37 .08 SHGPI 2 11 .37 1. education.36 .49 63 63 63 .47 .05 .66 .75 . Dev.10 Explanatory variables: Self-selection selfselm Social ties homog Peer monitoring freqmeet Group solidarity ingrins Group pressure peerpr Dynamic incentives sgsy Control variables infrstkm vilnrshg degree of self-selection homogeneity scale w.82 1.10 SHGPI 5* 53 .48 3. while SHGPI 5 refers to SHGPI 2 in the text.12 SHGPI 3* 53 . % intra-group loans in arrears. % intra-group loans in arrears.44 1. age. % members received credit and IGA SHG Performance Index composed of savings. % intra-group loans in arrears. % outside credit repaid at due date and social activities SHG Performance Index composed of savings.43 1.81 . marital status.11 SHGPI 4 53 .t. occupation and land ownership frequency of meeting (n° of times per month) dummy = 1 if provision of intra-group insurance dummy = 1 if group shows willingness to exert peer pressure dummy = 1 if group belongs to SGSY scheme mean distance (km) from basic infrastructure services n° of SHGs in the village 63 63 1. proportion outside credit taken and IGA (as defined above) SHG Performance Index composed of savings.16 .46 . proportion outside credit taken and social activities SHG Performance Index composed of savings. % members received credit.65 St.58 1. .65 .
692 (.675** (.914 (.267** (.493 (.711*** (3.020 (.475) -1.357) -.043) .888 - - Correlation coefficient (ρ) Sample selection term (λ) Obs (n°) Wald χ² (Prob) Log likelihood - - - 61 22.218) Selection equation: Lndur Selfselm Homog Freqmeet Ingrins Peerpr Sgsy Infrstkm Vilnrshg Intercept - 1.770) -.016*** (1.940* (.780) 2.025) -. 5 and 10% significance level denoted by ***.92 (0.192 (.108) -1.225) .022) .759) 1.025) -.064) .132*** (.071) .023 (.467** (.051) .550* (1.602** (.15 (0.985) -.164) .098) .123) Intlodel (Probit) 1.546 (2.060) .334) 1.746) Membcre (Tobit) -.057) -. ** and * respectively.035) .095 (.061) 61 60. 38 .223* (. Significance at 1.889 61 40.621) .Table A2: Regression analysis of potential determinants on groups’ savings and intragroup credit performance Dependent variable: Selfselm Homog Freqmeet Ingrins Peerpr Sgsy Infrstkm Vilnrshg Intercept Savperf (Tobit) .087 (.642 (.071*** (.082 (.508) 1.091 (.008 (.034 (.446 (.041 (.005 Standard errors are in parentheses.115* (.0016) -11.419* (.106) .091 (.121 (.388) 1.32 (0.129) -.010) .582) -12.734) .236 (.304** (.15 (0.363*** (.057) -.991) Outsdttl (Heckman ML) .248 (.120) .204) -.718) .077*** (.117* (.981) -5.197* (.026 (.0046) -48.056 (.700 53 24.935*** (.482) .264** (.386) -.043) -.159) .134*** (.239 (.048 (.666 (.355) -.266) .0000) -37.0000) 1.611** (.631) -2.457) .035 (.292) -.
561* (.130) -1.326) Selection equation: Leadwlth Leadedu Selfselm Homog Freqmeet Ingrins Peerpr Sgsy Infrstkm Vilnrshg Intercept - 2.37e-12) .161** (.018 (.347) .721) .023) -.193) -.19 (0. income generating and social activities performance Dependent variable: Selfselm Homog Freqmeet Ingrins Peerpr Sgsy Infrstkm Vilnrshg Intercept Outcred (Tobit) -6.0000) -1. 39 .122 (.116*** (.471** (.217) Igamm (Heckman ML) .455** (1.068) .027) .480) Socactmn (Ordered Logit) -.425 (.016 (.284 (.072 (.0326 (.278) -1.031 61 16.379 (. 5 and 10% significance level denoted by ***.078) -.850) 23.083) -.281*** (.707) -.155*** (.006) .905) -1*** (6.700) 3.855** (6.225) -7.094 (.393** (.813*** (.540*** (.119*** (.393* (.073*** (.080) .062 (.579) .3486) -74.525*** (.106 (.299** (1.494) 13.565 (2.048) 1.058) 61 58.259) -6.059 (.014) .109* (.707) 2.396 3.427 (.83 0. Significance at 1.113) -.186 Standard errors are in parentheses.117 (.188) .643 - 61 8.699) -.095) -.268 (.217) -.021** (1.002 (.316) 1.105 (1.336) -.226) -4.678 (10.475** (9.795 (2.291** (.099) -.064*** (1.058) -.432) -4.165 (.249) .391 (.494) .896** (1.484 (.043) 61 61.056*** (.118 (.133 (. ** and * respectively.035 (.114) -.464 (.387) -.650) .700 (.410) 1.254) .93 (0.153) -.592 (. The insignificant coefficients of the intercept term of the other cut off points in the ordered logit regression are not reported for the sake of brevity.554) .097) .793) -2.097) .799) Ocoutsrep (Heckman ML) .139 (4.403) .244** (.570) -.468) .251** (2.230) .0380) -81.Table A3: Regression analysis of potential determinants on groups’ outside credit.490** (.685 - Correlation coefficient (ρ) Sample selection term (λ) Obs (n°) Wald χ² (Prob) Log likelihood - 1*** (3.887 (4.81e-11) -.980) -2.230* (.32 (0.134) -1.716) -.0000 -11.649*** (.
005) .005 (. Significance at 1.584) -18.012 (.386 53 39.015 (.43 (0. ** and * respectively.012 (.005) .013) -.0060) 6.190 (.83 (0.041*** (.018* (.025) 61 21.035) -.012) -.0000) 54.062) .46 (0. 40 .151 - - - 53 64.046** (.415*** (.015 (.016 (.002 (.221 (1.188 (.211) .450 (.763*** (.006 (.0000) 56.001 (.008 (.790 (1.026 (.026 (.010 (.020*** (.896 53 63.021) .655) .006) .000 (.021) .Table A4: Regression analysis of potential determinants on constructed Self Help Group Performance Indices Dependent variable: SHGPI 1 (Tobit) SHGPI 2 (Heckman ML) .083*** (.006) .005 (.013) -.784*** (.755*** (.465 53 52.103 (.225) 1.673 Standard errors are in parentheses.053) -.025) .021 (.018) .015 (.83e-11) -.044) Selection equation: Leadwlth Leadedu Selfselm Homog Freqmeet Ingrins Peerpr Sgsy Infrstkm Vilnrshg Intercept Correlation coefficient (ρ) Sample selection term (λ) Obs (n°) Wald χ² (Prob) Log likelihood - 8.016 (.782*** (1.187** (.029 (.027 (.055) -.044) -.380 (1.008) .140) -.018) .029) -.147) 7.009) .186) .020) .319) SHGPI 3 (Tobit) SHGPI 4 (Tobit) SHGPI 5 (Tobit) Selfselm Homog Freqmeet Ingrins Peerpr Sgsy Infrstkm Vilnrshg Intercept -.391 (.0000) 51.439) -1.023*** (.68 (0.022 (.023) .0000) 62.003) -.030) -.031) -.018) .402) .070*** (.180) -.030 (.010) .011) -.005) .023*** (.59 (0.625) .018) -.015 (.704*** (2.251 (.179) -.445 (.009) .012) -.009) .023) .002 (.008 (.019*** (.055) -.010) .000 (.009) .045** (.087*** (. 5 and 10% significance level denoted by ***.095) .027) .023) -.899) .011 (.848 (1.656 -1*** (8.
153) .262 (.059 (.123) -.207) -.206) -.470** (. Significance at 1.276) Selection equation: Lndur Selfselm Homog Freqmeet Ingrins Peerpr Sgsy Infrstkm Vilnrshg Intercept LR χ² (Prob) Log likelihood Obs (n°) F stat (Prob) R² - 1. 41 .151) -.20 Standard errors are in parentheses.420) .034 (.297) .550 (.090*** (.340) 22.385) Membcre (IV) -.025 (.104 (.354 (.0000) 0.242) -.293) -.053 (.Table A5: IV regression analysis of potential determinants on groups’ savings and intra-group credit performance Dependent variable: Selfselm Homog Freqmeet Ingrins Peerpr Sgsy Infrstkm Vilnrshg IMR Intercept Savperf (IV) .225) -1. The monitoring (freqmeet). group solidarity (ingrins).48 52 6.066) .185) -.035) .570 61 - - - - 60 1.32 (0.013 (.0081) -12.124) nd Intlodel (IV) -.003 (.201 (.751) .078) -.235) .670) .111*** (.043) . peer pressure (peerpr) and dynamic incentive (sgsy) variables are instrumented.17 (0.461) -1.487 (.835** (.103) .0000) 0.182 (.2559) 0.24 60 4. Instruments are the percentage members joined later (membnew).096 (.103 (.056) .645) -2. the natural logarithm of the number of months of the group’s existence (durmeet) and a dummy = 1 if the village is homogeneous in caste (hocavil).09 52 6.339 (.315 (.050 (.061 (.049 (.180 (.748) -.557* (1.460) Outsdttl (1 stage: Probit) st Outsdttl (2 stage: IV) .292 (.134** (.334) -.054) .039 (.204 (.807* (.044) .871 (.133) -.006 (.054) .054* (.180) .090 (.999) -.032) .070) -.219 (.0007) 0.150*** (.322) .021 (.049) .032 (.601 (.57 (0.05 (0.237) .173 (.151 (.078*** (. ** and * respectively.204** (.267) .26 (0.359) -.011 (.308 (2. 5 and 10% significance level denoted by ***. the % divorced or abandoned young group members living in an extended family (diyextf).031) -.013 (.027) -.267) .107) .018) .
856) 60 0.193 (.269) 39.188) -.351 (.014 (.599) .925) 32.383) -.197) .498) -2.270) .597 (. group solidarity (ingrins).564 (1.240 (.816) .596 61 - Standard errors are in parentheses.057) .249) 16 0.169 (.153 .618) .096) -.364 (1.82 0.727 (.195 (.024 (.220) .490) -2. ** and * respectively.857) -.20 (0.742) .152) .664) .468) .854*** (.276) -.0000) -15.0008) Socactmn (IV) -.504 61 - 1.861** (1.576*** (.355) -.792) 1.515 (2.271) -8.771*** (3.166 (1.162) -.010 (.875*** (.108) .313 (2.433 (.374) -1.66 Igamm (1st stage: Probit) Igamm (2nd stage: IV) .154 (4.218 -.099 (1.246 (.928) .404) . 42 .211*** (.181 (5.332) -.250) -.540** (1.195 (.15 (0.168 (.253) .256) -.014) .606** (1.580) .564) .044 (. IGA and social activities performance Dependent variable: Selfselm Homog Freqmeet Ingrins Peerpr Sgsy Infrstkm Vilnrshg IMR Intercept Selection equation: Leadwlth Leadedu Selfselm Homog Freqmeet Ingrins Peerpr Sgsy Infrstkm Vilnrshg Intercept LR χ² (Prob) Log likelihood Obs (n°) F stat (Prob) R² Outcred (IV) -1.683) -2.005 (.017*** (.339) 2.205) 1.791*** (.110 (1.494** (.224) -4.014 (.762 (.353 (.649) 3. the natural logarithm of the number of months of the group’s existence (durmeet) and a dummy = 1 if the village is homogeneous in caste (hocavil). Significance at 1. 5 and 10% significance level denoted by ***.680) -.890** (.529 (.189*** (.102 (.491) 60 2. Instruments are the percentage members joined later (membnew). the % divorced or abandoned young group members living in an extended family (diyextf).648) -.152) 1.048) .481*** (.322 (.82 (0.555 (1.069 (.372) 1.0468) - 4.206 (.438* (.Table A6: IV regression analysis of potential determinants on groups’ outside credit.475* (.709 (.277 (. The monitoring (freqmeet).778) -3.379) .056) -.176* (.956) -.593) 3.608) 8.237 (.696 (3.38 (0.483 (1.621) 18 10.966) -.9263) Ocoutsrep (1st stage: Probit) Ocoutsrep (2nd stage: IV) .023* (1.299) 3.0003 -20. peer pressure (peerpr) and dynamic incentive (sgsy) variables are instrumented.
010) -. 5 and 10% significance level denoted by ***.017 (.727 .053) .070 (. Significance at 1.315) .000 (.071 (.42 SHGPI 2 (1st stage: Probit) SHGPI 2 (2nd stage: IV) .378*** (.005 (.388) -1.052) .26 8.375) -18. Instruments are the percentage members joined later (membnew).Table A7: IV regression analysis of potential determinants on the constructed SHG Performance Indices Dependent variable: Selfselm Homog Freqmeet Ingrins Peerpr Sgsy Infrstkm Vilnrshg IMR Intercept Selection equation: Leadwlth Leadedu Selfselm Homog Freqmeet Ingrins Peerpr Sgsy Infrstkm Vilnrshg Intercept LR χ² (Prob) Log likelihood Obs (n°) F stat (Prob) R² SHGPI 1 (IV) -.00 (0.016) .0003) 0.12 (0.243** (.007) .330 (.725*** (.020) .018 (.013 (.010 (. 11 0.052) .045 (.070) .086) -.247 (.292* (.057) 52 5.048) -.039) .080) .108) .035*** (.068) -.028 (.556) . 43 .020) .66 Standard errors are in parentheses.062) .007 (.164* (.075) .22 SHGPI 4 (IV) -.390 (.169) 52 3.015) . group solidarity (ingrins).351 (. the % divorced or abandoned young group members living in an extended family (diyextf).007 (.707) 1.064) -.016) .704) 7.041** (. ** and * respectively.012) .040 (.027) -.067 (.030 (.080 (.010) -.013) .143* (.120 (.021) -.97 (0.085) 52 4.028) .023) -.062) .040 (.001 (.014 (.179** (.043 (.062) 52 4. the natural logarithm of the number of months of the group’s existence (durmeet) and a dummy = 1 if the village is homogeneous in caste (hocavil).019 (.282 (.066) .511 (.022** (.727*** (.630*** (1.051) 52 3.015) .25 SHGPI 3 (IV) -.031 (.0013) 0.013) .036) .0002) 0.75 (0.084) -.38 SHGPI 5 (IV) -.007) .004 (.0031) 0.086** (.067 (. peer pressure (peerpr) and dynamic incentive (sgsy) variables are instrumented.009) -.738*** (1.054 (.038 (. The monitoring (freqmeet).035*** (.695) -.058) .030** (.961) .019 (.103) .074) .040) -.745*** (.135) .066) .069* (.0025) 0.012 (.64 (0.832 (.
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