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Group lending, matching patterns, and the mystery of microcredit: Evidence from Thailand

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  • Christian Ahlin

Abstract

How has the microcredit movement managed to push financial frontiers? Theory shows that if borrowers vary in unobservable risk, then group‐based, joint liability contracts price for risk more accurately than individual contracts, provided that borrowers match with others of similar project riskiness (Ghatak (1999, 2000)). This more accurate risk‐pricing can attract safer borrowers and rouse an otherwise dormant credit market. We extend the theory to include correlated risk, and show that borrowers will match with partners exposed to similar shocks to lower their chances of facing liability for their partners. We use unique data on Thai microcredit borrowing groups to test for homogeneous matching by project riskiness and type of risk exposure. Evidence supports the theory, in that groups are more homogeneous in riskiness but less diversified in type of risk exposure than they would be under random matching. The results suggest that group lending is improving risk‐pricing by embedding a discount for safe borrowers, and can thus explain part of the unprecedented rise in financial intermediation among the world's poor; but that a potential pitfall of voluntary group formation is antidiversification, which points to strategies for lender intervention.

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  • Christian Ahlin, 2020. "Group lending, matching patterns, and the mystery of microcredit: Evidence from Thailand," Quantitative Economics, Econometric Society, vol. 11(2), pages 713-759, May.
    • Handle: RePEc:wly:quante:v:11:y:2020:i:2:p:713-759
    DOI: 10.3982/QE1115
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    Cited by:

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    2. Al-Azzam, Moh’d & Charfeddine, Lanouar, 2022. "Financing new entrepreneurship: Credit or microcredit?," Economics Letters, Elsevier, vol. 216(C).
    3. Nicholas Sabin, 2023. "Choosing partners: selection priorities of joint liability group leaders," Empirical Economics, Springer, vol. 64(1), pages 323-348, January.
    4. Hartarska, Valentina M. & Zhang, Jingfang & Nadolnyak, Denis A., 2023. "Scope Economies from Rural and Urban Microfinance Services," 2023 Annual Meeting, July 23-25, Washington D.C. 335439, Agricultural and Applied Economics Association.
    5. Fujimoto, Junichi & Lee, Junsang, 2020. "Optimal self-financing microfinance contracts when borrowers have risk aversion and limited commitment," Journal of Mathematical Economics, Elsevier, vol. 91(C), pages 60-79.
    6. Valentina Hartarska & Jingfang Zhang & Denis A. Nadolnyak, 2023. "Scope economies from rural and urban microfinance services," Southern Economic Journal, John Wiley & Sons, vol. 89(4), pages 1138-1167, April.
    7. Altınok, Ahmet, 2023. "Group lending, sorting, and risk sharing," Games and Economic Behavior, Elsevier, vol. 140(C), pages 456-480.
    8. Cassidy, Rachel & Fafchamps, Marcel, 2020. "Banker my neighbour: Matching and financial intermediation in savings groups," Journal of Development Economics, Elsevier, vol. 145(C).
    9. Amani Gration Tegambwage & Pendo Shukrani Kasoga, 2022. "Loan repayment among group borrowers in Tanzania: the role of relationship quality," Future Business Journal, Springer, vol. 8(1), pages 1-11, December.

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