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Liability Structure in Small-Scale Finance: Evidence from a Natural Experiment

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Author Info

  • Fenella Carpena

    ()
    (UC Berkeley)

  • Shawn Cole

    ()
    (Harvard Business School, Finance Unit)

  • Jeremy Shapiro

    ()
    (Yale University)

  • Bilal Zia

    ()
    (World Bank)

Abstract

Microfinance, the provision of small individual and business loans, has witnessed dramatic growth, reaching over 150 million borrowers worldwide. Much of its success has been attributed to overcoming the challenges of information asymmetries in uncollateralized lending. Yet, very little is known about the optimal contract structure of such loans?there is substantial variation across lenders, even within a particular setting. This paper exploits a plausibly exogenous change in the liability structure offered by a microfinance program in India, which shifted from individual to group liability lending. We find evidence that the lending model matters: for the same borrower, required monthly loan installments are 11 percent less likely to be missed under the group liability setting, relative to individual liability. In addition, compulsory savings deposits are 20 percent less likely to be missed under group liability contracts.

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Bibliographic Info

Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 13-018.

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Length: 46 pages
Date of creation: Aug 2012
Date of revision:
Handle: RePEc:hbs:wpaper:13-018

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  1. Raghuram G. Rajan & Luigi Zingales, . "Financial Dependence and Growth," CRSP working papers 344, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  2. Stiglitz, Joseph E, 1990. "Peer Monitoring and Credit Markets," World Bank Economic Review, World Bank Group, vol. 4(3), pages 351-66, September.
  3. Karlan, Dean & Gine, Xavier, 2009. "Group versus Individual Liability: Long Term Evidence from Philippine Microcredit Lending Groups," Working Papers 61, Yale University, Department of Economics.
  4. Attanasio, Orazio & Augsburg, Britta & De Haas, Ralph & Fitzsimons, Emla & Harmgart, Heike, 2011. "Group lending or individual lending? Evidence from a randomised field experiment in Mongolia," MPRA Paper 35439, University Library of Munich, Germany.
  5. Christian Ahlin & Robert Townsend, 2002. "Using Repayment Data to Test Across Models of Joint Liability Lending," Vanderbilt University Department of Economics Working Papers 0227, Vanderbilt University Department of Economics.
  6. Armendariz de Aghion, Beatriz, 1999. "On the design of a credit agreement with peer monitoring," Journal of Development Economics, Elsevier, vol. 60(1), pages 79-104, October.
  7. Sharma, Manohar & Zeller, Manfred, 1997. "Repayment performance in group-based credit programs in Bangladesh: An empirical analysis," World Development, Elsevier, vol. 25(10), pages 1731-1742, October.
  8. Guinnane, T. & Banerjee, A. & Besley, T., 1993. "Thy Neighbor's Keeper: the Design of a Credit Cooperative with Theory and a Test," Papers 705, Yale - Economic Growth Center.
  9. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, vol. 46(1), pages 1-18, February.
  10. Beck, Thorsten & Demirguc-Kunt, Asli & Martinez Peria, Maria Soledad, 2005. "Reaching out : access to and use of banking services across countries," Policy Research Working Paper Series 3754, The World Bank.
  11. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
  12. Abhijit V. Banerjee & Andrew F. Newman, 1990. "Occupational Choice and the Process of Development," Discussion Papers 911, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Ambec, Stefan & Treich, Nicolas, 2007. "Roscas as financial agreements to cope with self-control problems," Journal of Development Economics, Elsevier, vol. 82(1), pages 120-137, January.
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Cited by:
  1. Orazio Attanasio & Britta Augsburg & Ralph de Haas & Emla Fitzsimons & Heike Harmgart, 2011. "Group lending or individual lending? Evidence from a randomised field experiment in Mongolia," IFS Working Papers W11/20, Institute for Fiscal Studies.

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