Community Lending with External Capital: Evidence From a Randomized Evaluation in Uganda(Article)
Accessing capital has long been a challenge for the poorest of the poor in rural communities around the globe. Community-based savings groups (SGs) overcome many of the aspects of this challenge and incentivize trustworthy behavior with funds, since they essentially allow for community members to borrow from their neighbors. However, the quantity of capital SGs can provide to their members is limited by the amount that SG members can save. This study investigates what happens when outside capital is provided to established savings groups. We conduct a randomized experiment with 90 SGs in rural Uganda to estimate the effect of the provision of outside capital on loans, savings, default, payment delays and payouts. We find that adding outside capital to SGs increases loans made to SG members and payouts received by SG members, illustrating that outside capital makes SGs do better on their most important outcomes. This intervention has no effect on the quantity of savings, confirming that SGs operate in an environment of scarcity. We also find the intervention has no effect on SG functioning as measured by disbandment, defaults or failure to repay loans. We conclude with a cost analysis demonstrating a high rate of return to the intervention, and recommend this intervention as a way to expand the rural poor’s access to capital, through their established and trusted networks, helping communities move towards the achievement of several of the sustainable development goals and Uganda’s goals for financial access for all.
Authoured by: Aloysius Byaruhanga , Sr. Marie Nakitende, Juliet Nambuubi
Academic units: Faculty of Education