GoKawiilEthical approval
This research was approved by the Central University Research Ethics Committee (CUREC) at the University of Oxford (reference no. SSD/CUREC1A/10-099). The approval included the collection process and analysis of administrative microfinance data and primary data from human participants collected through semi-structured interviews. The research was performed in accordance with all relevant guidelines and regulations outlined by CUREC. Informed consent was obtained from all participants. The microfinance institution and its clients are de-identified as per the data use agreement.
Empirical background
The microfinance institution was founded in 2002 and had a client base of approximately 18,000 borrowers at the time of data collection. In Sierra Leone, 68% of the population was estimated to be living below the national poverty line62. The organization offers small loans to low-income clients with the goal of local poverty alleviation. Group lending is a standard arrangement in developing countries, where potential clients seeking a loan enter into a joint liability contract63. An organization’s motivation for this arrangement is that potential clients often lack sufficient financial collateral, but a group contract may provide a form of social collateral64. Past research has noted that this lending structure creates a natural social dilemma38,65,66. More specifically, the group lending structure can be conceptualized as a threshold social dilemma, as the collective good—access to future credit—is provided only when full repayment is reached2,11,12.
Potential group lending clients are instructed to select group members that they know and trust67. Furthermore, loan officers ensure that each member meets basic eligibility criteria. Each client is required to have their own micro-business capable of meeting the minimum loan repayments.
Typical micro-business examples include petty trading, food services, barbershops, tailoring and motorbike taxi services. The loan amount ranges from 200,000 to 2,250,000 SLL per member per loan (at the time of data collection, the nominal exchange rate was US $1 = 4,300 SLL). All loans have the same fixed interest rate: 2% per month. Scheduled loan duration ranges from six to twelve months. Group size in the dataset ranges from two to six members, with an average of 4.36 members. Consistent with the organization’s objective to promote financial inclusion, 73.3% of the clients are female.
Eligibility for a subsequent loan cycle depends on a group’s repayment performance in the previous cycle. Full repayment is required, but timeliness of payments throughout the whole loan cycle also influences the decision. The institution incentivizes better group repayment with greater potential increases in the subsequent loan amounts. Groups that repay in full and on time receive the standard maximum loan increase for the next cycle. If the loan is paid in full, but with delayed payment(s), the group may be assigned a lesser loan increase, no loan increase or no loan renewal, on the basis of the frequency and severity of the delayed payment(s). The outcome is the same for all group members. Decisions regarding loan renewal and amount are made jointly by the group’s loan officer and loan portfolio manager. Variation in subsequent loan amounts implies that a single provision point for the collective good is a theoretical simplification of the full set of potential group outcomes. However, the core distributional conflict and individual incentive to contribute as little of one’s own resources as possible while reaching each provision point remains consistent.
Group loan enforcement operates in two phases: (1) internal enforcement of active loans and (2) institutional enforcement of delinquent loans. Group members are responsible for enforcing on each other during the active phase. Members use a variety of positive and negative enforcement mechanisms, such as encouragement, social pressure, embarrassment and ostracism. Past empirical research in this context has shown that natural variation in the social and spatial structure of joint-liability groups has a critical role in the ability and willingness to apply such social sanctions38. During this phase, the collective good is still achievable; that is, access to future credit. After approximately 30 days of delayed payment, enforcement gradually shifts to the institutional phase. In this phase, the possibility of qualifying for a subsequent loan rapidly declines. The loan is classified as inactive, and the institution initiates formal recovery procedures—typically involving debt collectors and legal threats. These efforts generally continue for at least a year until the group repays or the organization officially records the loan as a write-off and ceases efforts at collection. In the ‘Modelling’ section below, we define cooperative outcome measures using a 30-day window to capture meaningful behaviour attributable to internal group dynamics, distinct from institutional debt recovery efforts.
Quantitative materials and methods
Quantitative data collection
... continue reading