Banking on cooperation: an evolutionary analysis of microfinance loan repayment behaviour

Microfinance is an economic development tool that provides loans to low-income borrowers to stimulate economic growth and reduce financial hardship. Lenders typically require joint liability, where multiple borrowers share the responsibility of repaying a group loan. We propose that this lending practice creates a cooperation dilemma similar to that faced by humans and other organisms in nature across many domains. This could offer a real-world test case for evolutionary theories of cooperation from the biological sciences. In turn, such theories could provide new insights into loan repayment behaviour. We first hypothesise how group loan repayment efficacy should be affected by mechanisms of assortment from the evolutionary literature on cooperation, i.e. common ancestry (kin selection), prior interaction (reciprocity), partner choice, similarity of tags, social learning, and ecology and demography. We then assess selected hypotheses by reviewing 41 studies from 32 countries on micro-borrowers’ loan repayment, evaluating which characteristics of borrowers are associated with credit repayment behaviour. Surprisingly, we find that kinship is mostly negatively associated with repayment efficacy, but prior interaction and partner choice are both more positively associated. Our work highlights the scope of evolutionary theory to provide systematic insight into how humans respond to novel economic institutions and interventions.