GROUP LENDING TO THE RURAL POOR IN THE DOMINICAN REPUBLIC : A STUNTED INNOVATION

This report discusses one such innovation -- group lending -- and identifies the cause of its limited success in the Dominican Republic. Against a background of the purported advantages of group lending (a lowering of default rates and technical assistance and transaction costs) and Dominican Republic interest policies, group lending initiatives of the Dominican Development Foundation (DDF), one of the first credit organizations in the world to experiment with group lending, are analyzed. DDF has the largest group lending program in the Dominican Republic, providing production loans to groups of farmers lacking access to other formal credit sources. A recent study of a representative DDF initiative in Pablo illustrates the strengths and weaknesses of the DDF program. The study showed that group lending lowered both transaction and technical assistance costs, but that the costs to the DDF of forming and serving new and poorer groups (including the cost of collecting delinquent loans) were substantial. Joint liability worked as a sanction to encourage loan repayment with well-formed groups, but such sanctions proved ineffective with groups formed solely to obtain access to the loan or where the group had difficulty in obtaining the loan. To encourage commercial group lending, DDF initiated a loan guarantee program, covering defaults on a declining percentage basis over a 3-year period. After initial success, the program failed when banks pulled out of the program due to increased inflation and a jump in returns from loans to other sectors. DDF now faces increasing default rates, a decrease in the quality of its services, and reduced lending funds. The concessionary interest rates promoted in the Dominican Republic to spur agricultural production seem to be a major reason for DDF"s problems. A six-item bibliography (1968-79) is appended.