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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. Gine, Xavier & Karlan, Dean S., 2006. "Group versus individual liability : a field experiment in the Philippines," Policy Research Working Paper Series 4008, 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. Dean S. Karlan, 2005. "Social Connections and Group Banking," Working Papers 913, Economic Growth Center, Yale University.
    4. Van Tassel, Eric, 1999. "Group lending under asymmetric information," Journal of Development Economics, Elsevier, vol. 60(1), pages 3-25, October.
    5. 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.
    6. Besley, T. & Coate, S., 1991. "Group Lending, Repayment Incentives And Social Collateral," Papers 152, Princeton, Woodrow Wilson School - Development Studies.
    7. 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.
    8. 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.
    9. 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.
    10. Stiglitz, Joseph E, 1990. "Peer Monitoring and Credit Markets," World Bank Economic Review, World Bank Group, vol. 4(3), pages 351-66, September.
    11. 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.
    12. Christian Ahlin & Robert Townsend, 2003. "Selection into and across Credit Contracts: Theory and Field Research," Vanderbilt University Department of Economics Working Papers 0323, Vanderbilt University Department of Economics.
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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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