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Determinants of Moral hazard in Microfinance: Empirical Evidence from Joint Liability Lending Schemes in Malawi

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  • Simtowe, Franklin
  • Zeller, Manfred
  • Phiri, Alexander

Abstract

Moral hazard is widely reported as a problem in credit and insurance markets, mainly arising from information asymmetry. Although theorists have attempted to explain the success of Joint Liability Lending (JLL) schemes in mitigating moral hazard, empirical studies are rare. This paper investigates the determinants of moral hazard among JLL schemes from Malawi, using group level data from 99 farm and non-farm credit groups. Results reveal that peer selection, peer monitoring, peer pressure, dynamic incentives and variables capturing the extent of matching problems explain most of the variation in the incidence of moral hazard among credit groups. The implications are that Joint Liability Lending institutions will continue to rely on social cohesion and dynamic incentives as a means to enhancing their performance which has a direct implication on their outreach, impact and sustainability.

Suggested Citation

  • Simtowe, Franklin & Zeller, Manfred & Phiri, Alexander, 2006. "Determinants of Moral hazard in Microfinance: Empirical Evidence from Joint Liability Lending Schemes in Malawi," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25287, International Association of Agricultural Economists.
    • Handle: RePEc:ags:iaae06:25287
    DOI: 10.22004/ag.econ.25287
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    References listed on IDEAS

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    Cited by:

    1. Luminita Postelnicu & Niels Hermes & Roselia Servin Juarez, 2015. "Social Capital and the Repayment of Microfinance Group Lending. A Case Study of Pro Mujer Mexico," Working Papers CEB 15-023, ULB -- Universite Libre de Bruxelles.
    2. Do Xuan Luan & Nguyen Thanh Vu & Kieu Thi Thu Huong & Duong Hang & Siegfried Bauer, 2016. "Is Access to Agribank Credit an Effective Tool in Improving Household Income? Evidence from the Northern Mountainous Region of Vietnam," Asian Social Science, Canadian Center of Science and Education, vol. 12(8), pages 110-110, August.
    3. Luminita Postelnicu & Niels Hermes & Ariane Szafarz, 2014. "Defining Social Collateral in Microfinance Group Lending," Palgrave Studies in Impact Finance, in: Roy Mersland & R. Øystein Strøm (ed.), Microfinance Institutions, chapter 10, pages 187-207, Palgrave Macmillan.
    4. Fadhil, Rahmat & Yusuf, Muhammad Yasir & Bahri, T. Saiful & Maulana, Hafiizh & Fakhrurrazi, Fakhrurrazi, . "Precaution Strategy of Moral Hazard Practice in Agricultural Insurance in Indonesia: An Approach of Soft Systems Methodology," Economia Agraria y Recursos Naturales, Spanish Association of Agricultural Economists, vol. 21(02).
    5. Kasarjyan, Milada, 2011. "Improving the functioning of the rural financial markets of Armenia," Studies on the Agricultural and Food Sector in Transition Economies, Leibniz Institute of Agricultural Development in Transition Economies (IAMO), volume 62, number 62.
    6. Arshad A. Khan & Sufyan U. Khan & Shah Fahad & Muhammad A. S. Ali & Aftab Khan & Jianchao Luo, 2021. "Microfinance and poverty reduction: New evidence from Pakistan," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 4723-4733, July.
    7. Ricardo Bebczuk & Francisco Haimovich, 2007. "MDGs and Microcredit: An Empirical Evaluation for Latin American Countries," CEDLAS, Working Papers 0048, CEDLAS, Universidad Nacional de La Plata.
    8. Nogales Carvajal, Cristian Ricardo, 2008. "El éxito de la autorregulación de las instituciones microfinancieras en Bolivia: una prueba empírica [The success of micro financial institutions' auto-regulation: empiric evidence of the Bolivian ," MPRA Paper 53018, University Library of Munich, Germany, revised Dec 2008.
    9. Gehrig, Stefan & Mesoudi, Alex & Lamba, Shakti, 2020. "Banking on cooperation: An evolutionary analysis of microfinance loan repayment behaviour," OSF Preprints tmpqj, Center for Open Science.
    10. Ricardo N. Bebczuk, 2008. "Financial Inclusion in Latin America and the Caribbean: Review and Lessons," CEDLAS, Working Papers 0068, CEDLAS, Universidad Nacional de La Plata.
    11. Luminita Postelnicu, 2012. "Social Capital and Repayment Performance of Group Lending in Microfinance," Working Papers CEB 12-032, ULB -- Universite Libre de Bruxelles.
    12. Gonzalo Villa‐Cox & Francesco Cavazza & Cristian Jordan & Mijail Arias‐Hidalgo & Paúl Herrera & Ramon Espinel & Davide Viaggi & Stijn Speelman, 2021. "Understanding constraints on private irrigation adoption decisions under uncertainty in data constrained settings: A novel empirical approach tested on Ecuadorian Cocoa cultivations," Agricultural Economics, International Association of Agricultural Economists, vol. 52(6), pages 985-999, November.
    13. Kangogo, Daniel & Lagat, Job & Ithinji, Gicuru, 2013. "The Influence of Social Capital Dimensions on Household Participation in Micro-Credit Groups and Loan Repayment Performance in Uasin Gishu County, Kenya," MPRA Paper 48624, University Library of Munich, Germany.
    14. Ernest Gyapong & Daniel Gyimah & Ammad Ahmed, 2021. "Religiosity, borrower gender and loan losses in microfinance institutions: a global evidence," Review of Quantitative Finance and Accounting, Springer, vol. 57(2), pages 657-692, August.

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