Group Lending and Its Implications in Credit Markets for Poor People
AbstractGroup lending has proved to be a successful form of lending in credit markets for poor people. In this paper, the policy of the Grameen Bank in Bangladesh is modeled. It is shown that under certain conditions making borrowers jointly liable for their loans can induce repayment even in the absence of formal credit enforcement mechanisms. A distinction is made between ability and willingness to repay. Both aspects crucially depend on the social setting and on the loan size. If social ties are too loose, the social pressure generated by joint liability is not sufficient to induce borrowers to repay. This constraint is more binding in the case of micro-credits.
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Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G20 - Financial Economics - - Financial Institutions and Services - - - General
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
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