Switching from Group Lending to Individual Lending: The Experience at China’s Largest Microfinance Institution

ABSTRACT

We analyze group and individual lending using data from 26,579 loan-specific observations in 2014–2016 for CFPA Microfinance, China’s largest microfinance institution (MFI). We show that MFIs in China have converted a large share of their group liability portfolio into individual liability lending, particularly in southern China. Changes in loan contracts, especially loan size and interest rates, significantly increased repayment risk, whereas long borrowing history improved repayment performance. The higher repayment risk of individual lending was likely compensated by higher interest income. Our research indicates that, under certain circumstances, individual lending can be an important form of loans for MFIs.

KEY WORDS:

• group lending
• individual lending
• microfinance
• repayment risk

Acknowledgments

We thank the editor Ali Kutan, two anonymous referees, and discussants and participants at the 2018 International Finance and Accounting Conference of Northwest A&F University for valuable comments and discussions.

Supplementary material

Supplemental data for this article can be accessed here.

Notes

1. See CFPA Microfinance website: www.cfpamf.com.cn.

2. The rate of urbanization in China rose from 30.48% in 1996 to 57.35% in 2016 (China Statistical Yearbook 2016).

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71573125,71773049].