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Do Peer Group Members Outperform Individual Borrowers? A Test of Peer Group Lending Using Canadian Micro-Credit Data

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  • Rafael Gomez
  • Eric Santor

Abstract

Microfinance institutions now serve over 10 million poor households in the developing and developed world, and much of their success has been attributed to their innovative use of peer group lending. There is very little empirical evidence, however, to suggest that group lending schemes offer a superior institutional design over lending programs that serve individual borrowers. The authors find empirical evidence that group lending does indeed lower borrower default rates more than conventional individual lending, and that this effect operates through the dual channels of selection into the peer lending program and, once inside the program, greater group borrower effort.

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  • Rafael Gomez & Eric Santor, 2003. "Do Peer Group Members Outperform Individual Borrowers? A Test of Peer Group Lending Using Canadian Micro-Credit Data," Staff Working Papers 03-33, Bank of Canada.
    • Handle: RePEc:bca:bocawp:03-33
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    Cited by:

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    2. McIntosh, Craig & Villaran, Gonzalo & Wydick, Bruce, 2011. "Microfinance and Home Improvement: Using Retrospective Panel Data to Measure Program Effects on Fundamental Events," World Development, Elsevier, vol. 39(6), pages 922-937, June.
    3. Chowdhury, Shyamal & Chowdhury, Prabal Roy & Sengupta, Kunal, 2014. "Sequential lending with dynamic joint liability in micro-finance," Journal of Development Economics, Elsevier, vol. 111(C), pages 167-180.
    4. Paal, Beatrix & Wiseman, Thomas, 2011. "Group insurance and lending with endogenous social collateral," Journal of Development Economics, Elsevier, vol. 94(1), pages 30-40, January.
    5. Unger, Jens M. & Rauch, Andreas & Frese, Michael & Rosenbusch, Nina, 2011. "Human capital and entrepreneurial success: A meta-analytical review," Journal of Business Venturing, Elsevier, vol. 26(3), pages 341-358, May.
    6. ZOUARI, Zeineb & NABI, Mahmoud Sami, 2013. "Enhancing the Enforceability of Islamic Microfinance Contracts in OIC countries," MPRA Paper 49816, University Library of Munich, Germany.
    7. Xuchen Lin & Xiaolong Li & Zhong Zheng, 2017. "Evaluating borrower’s default risk in peer-to-peer lending: evidence from a lending platform in China," Applied Economics, Taylor & Francis Journals, vol. 49(35), pages 3538-3545, July.
    8. Freedman, Seth & Jin, Ginger Zhe, 2017. "The information value of online social networks: Lessons from peer-to-peer lending," International Journal of Industrial Organization, Elsevier, vol. 51(C), pages 185-222.
    9. Hisaki Kono, 2006. "Is group lending a good enforcement scheme for achieving high repayment rates? Evidence from field experiments in vietnam," Artefactual Field Experiments 00075, The Field Experiments Website.
    10. Shyamal Chowdhury & Prabal Roy Chowdhury & Kunal Sengupta, 2014. "Sequential lending with dynamic joint liability in micro-finance," Discussion Papers 14-07, Indian Statistical Institute, Delhi.
    11. Klein, Thilo, 2017. "Intermediation in peer-to-peer markets: Evidence from auctions for personal loans," ZEW Discussion Papers 17-073, ZEW - Leibniz Centre for European Economic Research.
    12. Kurosaki, Takashi & Khan, Hidayat Ullah, 2011. "Vulnerability of Microfinance to Strategic Default and Covariate Shocks:Evidence from Pakistan," PRIMCED Discussion Paper Series 10, Institute of Economic Research, Hitotsubashi University.
    13. Michael Alexeev & Mira Nurmakhanova & Leonid I. Polishchuk, 2021. "Institutions and social capital in group lending," Russian Journal of Economics, ARPHA Platform, vol. 7(4), pages 269-296, December.
    14. Mojtahed , Ahmad & Hassanzadeh , Ali, 2009. "The Evaluation of Qard-al-Hasan as a Microfinance Approach in Poverty Alleviation Programs," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 5(2), pages 1-32, April.
    15. Griffin, Denis & Husted, Bryan W., 2015. "Social sanctions or social relations? Microfinance in Mexico," Journal of Business Research, Elsevier, vol. 68(12), pages 2579-2587.
    16. Ki Taek Park & Hyejeong Yang & So Young Sohn, 2022. "Recommendation of investment portfolio for peer-to-peer lending with additional consideration of bidding period," Annals of Operations Research, Springer, vol. 315(2), pages 1083-1105, August.
    17. Peter Werner, 2010. "The Dynamics of Cooperation in Group Lending - A Microfinance Experiment," Working Paper Series in Economics 49, University of Cologne, Department of Economics.
    18. Ntwiga, Davis Bundi, 2018. "Credit risk analysis for low income earners," KBA Centre for Research on Financial Markets and Policy Working Paper Series 24, Kenya Bankers Association (KBA).
    19. George Okello Candiya Bongomin & Joseph Mpeera Ntayi & John C. Munene & Isaac Nkote Nabeta, 2016. "Financial Inclusion in Rural Uganda: Testing Interaction Effect of Financial Literacy and Networks," Journal of African Business, Taylor & Francis Journals, vol. 17(1), pages 106-128, January.

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    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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