Repayment incentives and the distribution of gains from group lending
AbstractGroup loans with joint liability have been a distinguishing feature of many microfinance programs. While such lending has benefitted millions of borrowers, major lending institutions have acknowledged their limited impact among the very poor and have recently favored individual contracts. This paper attempts to understand these empirical patterns using a model in which there is a single investment project and access to credit is limited by weak repayment incentives. We show that in the absence of large social sanctions, the poorest borrowers are offered individual and not group contracts. When both types of contracts are feasible, the relative gains from group loans are shown to be decreasing in loan size. We compare the role of bank enforcement with social sanctions and find that bank enforcement is more effective in increasing outreach while social sanctions raise the welfare of infra-marginal borrowers. Finally, we explore the welfare effects of group size and find that those requiring small loans are better served by larger groups but group size effects are, in general, ambiguous.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8197.
Date of creation: Jan 2011
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Other versions of this item:
- Baland, Jean-Marie & Somanathan, Rohini & Wahhaj, Zaki, 2013. "Repayment incentives and the distribution of gains from group lending," Journal of Development Economics, Elsevier, vol. 105(C), pages 131-139.
- Jean-Marie Baland & Rohini Somanathan & Zaki Wahhaj, 2010. "Repayment Incentives And The Distribution Of Gains From Group Lending," Working papers 192, Centre for Development Economics, Delhi School of Economics.
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
- O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
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- de Quidt, Jonathan & Fetzer, Thiemo & Ghatak, Maitreesh, 2013.
"Group Lending Without Joint Liability,"
CEPR Discussion Papers
9578, C.E.P.R. Discussion Papers.
- Thiemo Fetzer & Maitreesh Ghatak & Jonathan de Quidt, 2013. "Group Lending Without Joint Liability," STICERD - Economic Organisation and Public Policy Discussion Papers Series 44, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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