Traditional banks and microfinance institutions lend directly to clients using individual or joint liability contracts, and generally have strict rules on selection and repayments. In most rural areas of sub-Saharan Africa, these formal institutions are uncommon. Financial services are more often provided by Savings Groups; however, these are often unable to fully meet local financial needs. In this paper, we study an alternative lending model with the potential to bridge the gap between formal and informal finance. In this delegated lending model, better known as linkage, a formal financial institution lends to Savings Groups and lets the group decide the allocation of borrowed funds.
In our RCT, a random sample of existing Savings Groups gained access to linkage loans from a commercial bank in Uganda. We show that the bank loan stimulated an immediate and sizable increase in internal lending, which is sustained over time. Despite this benefit, we also found that linkages are a double-edged sword: On the one hand, members of treated groups had temporarily lower rates of food insecurity after two years, and point estimates suggest sizable increases in income and microenterprise size (which are not statistically signicant). On the other hand, groups assigned to loans experienced signicantly more turnover, suggesting that the possibility of external financing generates powerful selection effects.