Group credit: A means to improve information transfer and loan repayment performance

Abstract

Information asymmetries plague credit markets in developing countries, leading to selective rationing and market segmentation with adverse income distributional consequences for small borrowers. Data collected from the FINCA group credit programme in Costa Rica were used to study the viability and cost effectiveness of group credit as a means to transmit information on borrower creditworthiness. Groups that screened members and used local information had lower delinquency rates than those that did not. However, less than half the groups had positive rates of economic return, suggesting that group lending may improve information flow but is a cost‐sensitive institutional design.