Community lending with external capital: evidence from a randomized evaluation in Uganda

Abstract

Community-based savings groups (SGs) both provide credit to the poor and incentivize repayment by allowing community members to borrow from their neighbors. Available capital is typically limited by members' savings, however. We study an intervention relaxing this constraint by exogenously adding initial capital to SGs. Unlike traditional bank loans, this outside money is paid back with the same timing and formula as the other members of the SG, greatly simplifying the process for the SG. Using a randomized experiment in rural Uganda, we find this increases both loans made to SG members and payouts received by SG members. We find no evidence that the intervention compromises the functioning of the SGs. It has no significant effect on the quantity of savings and no effect on SG functioning as measured by disbandment, defaults or failure to repay loans. Cost-benefit calculations indicate a high social rate of return to the intervention.