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Group Lending versus Individual Lending in Microfinance

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  • Lehner, Maria
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    Abstract

    Microfinance is typically associated with joint liability of group members. However, a large part of microfinance institutions rather offers individual instead of group loans. We analyze the incentive mechanisms in both individual and group contracts. Moreover, we show that microfinance institutions offer group loans when the loan size is rather large, refinancing costs are high, and competition between microfinance institutions is low. Otherwise, individual loans are offered. Interestingly, our analysis predicts that individual lending in microfinance will gain in importance in the future if microfinance institutions continue to get better access to capital markets and if competition further rises.

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    File URL: http://epub.ub.uni-muenchen.de/13255/1/299.pdf
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    Bibliographic Info

    Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 299.

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    Date of creation: Aug 2009
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    Handle: RePEc:trf:wpaper:299

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    Keywords: microfinance; group loans; individual loans;

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    References

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    1. Ghatak, Maitreesh & Guinnane, Timothy W., 1999. "The economics of lending with joint liability: theory and practice," Journal of Development Economics, Elsevier, vol. 60(1), pages 195-228, October.
    2. Ahlin, Christian & Townsend, Robert M., 2007. "Selection into and across credit contracts: Theory and field research," Journal of Econometrics, Elsevier, vol. 136(2), pages 665-698, February.
    3. Van Tassel, Eric, 1999. "Group lending under asymmetric information," Journal of Development Economics, Elsevier, vol. 60(1), pages 3-25, October.
    4. 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.
    5. Dean Karlan & Xavier Giné, 2007. "Group Versus Individual Liability: A Field Experiment in the Philippines," Working Papers 111, Center for Global Development.
    6. Sergio Navajas & Jonathan Conning & Claudio Gonzalez-Vega, 2003. "Lending technologies, competition and consolidation in the market for microfinance in Bolivia," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(6), pages 747-770.
    7. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, vol. 46(1), pages 1-18, February.
    8. Dean S. Karlan, 2005. "Social Connections and Group Banking," Working Papers 181, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
    9. 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.
    10. Craig McIntosh & Alain Janvry & Elisabeth Sadoulet, 2005. "How Rising Competition Among Microfinance Institutions Affects Incumbent Lenders," Economic Journal, Royal Economic Society, vol. 115(506), pages 987-1004, October.
    11. Stiglitz, Joseph E, 1990. "Peer Monitoring and Credit Markets," World Bank Economic Review, World Bank Group, vol. 4(3), pages 351-66, September.
    12. Richard Montgomery, 1996. "Disciplining or protecting the poor? Avoiding the social costs of peer pressure in micro-credit schemes," Journal of International Development, John Wiley & Sons, Ltd., vol. 8(2), pages 289-305.
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    Cited by:
    1. Wagner, Charlotte, 2010. "From boom to bust: how different has microfinance been from traditional banking?," Frankfurt School - Working Paper Series 156, Frankfurt School of Finance and Management.

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