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Group-lending: Sequential financing, lender monitoring and joint liability

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  • Prabal Roy Chowdhury

    ()
    (Indian Statistical Institute, New Delhi)

Abstract

We develop a simple model of group-lendingbased on peer monitoring and moral hazard. We find that, in the absence of sequential financing or lender monitoring, group-lending schemes may involve under-monitoring with the borrowers investing in undesirable projects. Moreover, under certain parameter configurations, group-lending schemes involving either sequential financing, or a combination of lender monitoringand joint liability are feasible. In fact, group-lending schemes with sequential financing may succeed even in the absence of joint liability, though the repayment rate will be lower. In the absence of joint liability, however, group-lending with lender monitoring is unlikely to be feasible.

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Bibliographic Info

Paper provided by Indian Statistical Institute, New Delhi, India in its series Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers with number 04-10.

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Length: 32 pages
Date of creation: Dec 2003
Date of revision:
Handle: RePEc:ind:isipdp:04-10

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Keywords: Group-lending; joint liability; peer monitoring; sequential financing; under-monitoring; lender monitoring;

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  1. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
  2. Maitreesh Ghatak & Timothy W. Guinnane, 1998. "The Economics of Lending with Joint Liability: Theory and Practice," Discussion Papers 98-16, University of Copenhagen. Department of Economics.
  3. Van Tassel, Eric, 1999. "Group lending under asymmetric information," Journal of Development Economics, Elsevier, vol. 60(1), pages 3-25, October.
  4. Huppi, Monika & Feder, Gershon, 1989. "The role of groups and credit cooperatives in rural lending," Policy Research Working Paper Series 284, The World Bank.
  5. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, vol. 46(1), pages 1-18, February.
  6. Mark Schreiner, 2001. "A Cost-Effectiveness Analysis of the Grameen Bank of Bangladesh," Development and Comp Systems 0109007, EconWPA.
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  8. Stiglitz, Joseph E, 1990. "Peer Monitoring and Credit Markets," World Bank Economic Review, World Bank Group, vol. 4(3), pages 351-66, September.
  9. Rahman, Aminur, 1999. "Micro-credit initiatives for equitable and sustainable development: Who pays?," World Development, Elsevier, vol. 27(1), pages 67-82, January.
  10. Ghatak, Maitreesh, 2000. "Screening by the Company You Keep: Joint Liability Lending and the Peer Selection Effect," Economic Journal, Royal Economic Society, vol. 110(465), pages 601-31, July.
  11. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
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  13. Banerjee, Abhijit V & Besley, Timothy & Guinnane, Timothy W, 1994. "Thy Neighbor's Keeper: The Design of a Credit Cooperative with Theory and a Test," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 491-515, May.
  14. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
  15. Varian, H.R., 1989. "Monitoring Agents With Other Agents," Papers 89-18, Michigan - Center for Research on Economic & Social Theory.
  16. Beatriz Armendáriz de Aghion & Jonathan Morduch, 2000. "Microfinance Beyond Group Lending," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(2), pages 401-420, July.
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