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Borrower Empowerment and Savings: A Two-stage Micro-finance Scheme

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Roy Chowdhury, Prabal

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Abstract

We consider group-lending with joint liability where the provision of loans is conditional on prior savings. In a dynamic model with moral hazard and endogenous group-formation, we examine the effect of such schemes on the allocation of loans between strongly and weakly empowered borrowers. We find that he savings requirement may help to screen out weak borrowers. Further, as long as the borrowers are not too similar, it increases the incentive for ``positive assortative matching (PAM).'' For intermediate interest rates, group-lending leads to ``PAM'' with a screening out of weak borrowers. It is thus feasible, whereas individual lending, which does not allow for such screening, is not. Interestingly, for relatively high interest rates, individual lending may dominate group-lending.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3405.

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Date of creation: Jun 2007
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Handle: RePEc:pra:mprapa:3405

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Related research
Keywords: Assortative matching; empowered borrowers; joint liability lending; savings.;

Find related papers by JEL classification:
O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
O20 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - General
O15 - Economic Development, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!] (restricted)
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  2. Kumar Aniket, 2006. "Does Subsidising the Cost of Capital Help the Poorest? An Analysis of Saving Opportunities in Group Lending," ESE Discussion Papers 140, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
  3. Kumar Aniket, 2005. "Sequential Group Lending with Moral Hazard," ESE Discussion Papers 136, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
  4. Beatriz Armendariz & Jonathan Morduch, 2007. "The Economics of Microfinance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262512017.
  5. Kaushik Basu, 2004. "Gender and Say A Model of Household Behavior with Endogenously-determined Balance of Power," Harvard Institute of Economic Research Working Papers 2054, Harvard - Institute of Economic Research. [Downloadable!]
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  1. Roy Chowdhury, Prabal & Roy, Jaideep, 2007. "Public-private Partnerships in Micro-finance: Should NGO Involvement be Restricted?," MPRA Paper 4469, University Library of Munich, Germany. [Downloadable!]
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