Microfinance programs have traditionally relied on the concept of group liability to screen and enforce repayment among clients with no collateral or formal credit history. However, there are some important drawbacks to the approach.  For example, social tensions in group lending have the potential to harm social networks in villages as well as increase dropout rates in situations when clients with smaller loans are forced to guarantee larger loans.  The concern over social tension and sustainability of the groups suggestions that individual liability loans may be better for some clients.   

To address the issue, IPA developed a study with a rural bank, Green Bank, Inc. in the Visayas region of the Philippines.  The evaluation of its group lending product, called "BULAK," explores the relative merits of group vs. individual liability loan products in two phases. The first phase started in 2004 and entailed the conversion of pre-existing group liability centers to centers without group liability (but the group meeting remained intact).  The second phase began in 2005 and incorporated new centers into the evaluation in order to test whether the individually liability structure performs differently when it is initially formed rather than converted. 

In these new areas, we first conduct a brief microenterprise census and then randomly assign villages to one of three groups: (a) groups with individual liability, (b) groups with group liability, and (c) groups with group liability for their first loans and individual liability thereafter. For all individual liability centers, only group liability was removed. Credit officers could no longer ask center members to enforce repayment and center members are not required to co-sign for one another. The analysis uses a microenterprise census to predict who in the village is likely to join the credit programs. The baseline also allows us to analyze the selection difference between group and individual liability (Does individual liability attract wealthier (or poorer) clients? Or more (or less) socially connected individuals?).