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Determinants of Moral Hazard in Microfinance: Empirical Evidence from Joint Liability Lending Programs in Malawi

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  • Simtowe, Franklin
  • Zeller, Manfred

Abstract

Moral hazard is widely reported as a problem in credit and insurance markets, mainly arising from information asymmetry. Although theorists have attempted to explain how group lending with joint liability can be an important tool for mitigating moral hazard among the poor, empirical studies are rare and sometimes give mixed results. In Malawi, for example, although, group lending with joint liability has been practiced for nearly four decades, the unwillingness to repay loans remains the single major cause of default. This paper examines the extent of occurrence of moral hazard and investigates its determinants of occurrence among joint liability lending programs from Malawi, using group level data from 99 farm and non-farm credit groups. Results reveal that peer selection, peer monitoring, peer pressure, dynamic incentives and variables capturing the extent of matching problems explain most of the variation in the incidence of moral hazard among credit groups. The implications are that joint liability lending institutions will continue to rely on social cohesion and dynamic incentives as a means to enhancing their performance which has a direct implication on their outreach, impact and sustainability.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 461.

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Date of creation: 12 Oct 2006
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Handle: RePEc:pra:mprapa:461

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Keywords: moral hazard; joint liability; dynamic incentives; group lending; Malawi;

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  1. Conning, Jonathan, 1999. "Outreach, sustainability and leverage in monitored and peer-monitored lending," Journal of Development Economics, Elsevier, Elsevier, vol. 60(1), pages 51-77, October.
  2. Besley, T. & Coate, S., 1991. "Group Lending, Repayment Incentives And Social Collateral," Papers, Princeton, Woodrow Wilson School - Development Studies 152, Princeton, Woodrow Wilson School - Development Studies.
  3. de Aghion, Beatriz Armendariz & Gollier, Christian, 2000. "Peer Group Formation in an Adverse Selection Model," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 110(465), pages 632-43, July.
  4. 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.
  5. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, Elsevier, vol. 60(1), pages 27-50, October.
  6. Guinnane, T.W., 1992. "A Failed Institutional Transplant: Raiffeisen's Credit Cooperatives in Ireland, 1894-1914," Papers, Princeton, Woodrow Wilson School - Development Studies 165, Princeton, Woodrow Wilson School - Development Studies.
  7. Che Yeon-Koo, 2002. "Joint Liability and Peer Monitoring under Group Lending," The B.E. Journal of Theoretical Economics, De Gruyter, De Gruyter, vol. 2(1), pages 1-28, July.
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Cited by:
  1. Kangogo, Daniel & Lagat, Job & Ithinji, Gicuru, 2013. "The Influence of Social Capital Dimensions on Household Participation in Micro-Credit Groups and Loan Repayment Performance in Uasin Gishu County, Kenya," MPRA Paper 48624, University Library of Munich, Germany.
  2. Cristian Ricardo Nogales Carvajal, 2008. "El exito de la autorregulacion de las instituciones microfinancieras en Bolivia: una prueba empirica," Investigación & Desarrollo 0208, Universidad Privada Boliviana, revised Mar 2008.
  3. Kasarjyan, Milada, 2011. "Improving the functioning of the rural financial markets of Armenia," Studies on the Agricultural and Food Sector in Central and Eastern Europe, Leib­niz Institute of Agricultural Development in Central and Eastern Europe (IAMO), volume 62, number 62.
  4. Ricardo N. Bebczuk, 2008. "Financial Inclusion in Latin America and the Caribbean: Review and Lessons," CEDLAS, Working Papers, CEDLAS, Universidad Nacional de La Plata 0068, CEDLAS, Universidad Nacional de La Plata.
  5. Ricardo Bebczuk & Francisco Haimovich, 2007. "MDGs and Microcredit: An Empirical Evaluation for Latin American Countries," CEDLAS, Working Papers, CEDLAS, Universidad Nacional de La Plata 0048, CEDLAS, Universidad Nacional de La Plata.
  6. Jeffrey Carpenter & Tyler Williams, 2010. "Moral hazard, peer monitoring, and microcredit: field experimental evidence from Paraguay," Working Papers, Federal Reserve Bank of Boston 10-6, Federal Reserve Bank of Boston.

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