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Liability structure in small-scale finance : evidence from a natural experimen

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  • Carpena, Fenella
  • Cole, Shawn
  • Shapiro, Jeremy
  • Zia, Bilal

Abstract

Microfinance, the provision of small individual and business loans, has witnessed dramatic growth, reaching over 150 million borrowers worldwide. Much of its success has been attributed to overcoming the challenges of information asymmetries in uncollateralized lending. Yet, very little is known about the optimal contract structure of such loans -- there is substantial variation across lenders, even within a particular setting. This paper exploits a plausibly exogenous change in the liability structure offered by a microfinance program in India, which shifted from individual to group liability lending. The analysis finds compelling evidence that contract structure matters: for the same borrower, required monthly loan installments are 6 percent less likely to be missed under the group liability setting, relative to individual liability. In addition, compulsory savings deposits are 19 percent less likely to be missed under group liability contracts.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5427.

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Date of creation: 01 Sep 2010
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Handle: RePEc:wbk:wbrwps:5427

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Keywords: Debt Markets; Bankruptcy and Resolution of Financial Distress; Access to Finance; Microfinance; Deposit Insurance;

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  1. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, American Economic Association, vol. 88(3), pages 559-86, June.
  2. Sharma, Manohar & Zeller, Manfred, 1997. "Repayment performance in group-based credit programs in Bangladesh: An empirical analysis," World Development, Elsevier, Elsevier, vol. 25(10), pages 1731-1742, October.
  3. Beck, Thorsten & Demirguc-Kunt, Asli & Martinez Peria, Maria Soledad, 2007. "Reaching out: Access to and use of banking services across countries," Journal of Financial Economics, Elsevier, Elsevier, vol. 85(1), pages 234-266, July.
  4. Ambec, Stefan & Treich, Nicolas, 2007. "Roscas as financial agreements to cope with self-control problems," Journal of Development Economics, Elsevier, Elsevier, vol. 82(1), pages 120-137, January.
  5. Attanasio, Orazio & Augsburg, Britta & de Haas, Ralph & Fitzsimons, Emla & Harmgart, Heike, 2014. "Group lending or individual lending? Evidence from a randomised field experiment in Mongolia," Discussion Papers, Research Unit: Economics of Change SP II 2014-303, Social Science Research Center Berlin (WZB).
  6. Christian Ahlin & Robert Townsend, 2002. "Using Repayment Data to Test Across Models of Joint Liability Lending," Vanderbilt University Department of Economics Working Papers 0227, Vanderbilt University Department of Economics.
  7. Armendariz de Aghion, Beatriz, 1999. "On the design of a credit agreement with peer monitoring," Journal of Development Economics, Elsevier, Elsevier, vol. 60(1), pages 79-104, October.
  8. Stiglitz, Joseph E, 1990. "Peer Monitoring and Credit Markets," World Bank Economic Review, World Bank Group, World Bank Group, vol. 4(3), pages 351-66, September.
  9. 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.
  10. Guinnane, T. & Banerjee, A. & Besley, T., 1993. "Thy Neighbor's Keeper: the Design of a Credit Cooperative with Theory and a Test," Papers, Yale - Economic Growth Center 705, Yale - Economic Growth Center.
  11. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(2), pages 274-98, April.
  12. Xavier Giné & Dean Karlan, 2009. "Group versus Individual Liability: Long Term Evidence from Philippine Microcredit Lending Groups," Working Papers, Economic Growth Center, Yale University 970, Economic Growth Center, Yale University.
  13. Feigenberg, Benjamin & Field, Erica Marie & Pande, Rohini, 2010. "Building Social Capital Through Microfinance," Scholarly Articles 4449105, Harvard Kennedy School of Government.
  14. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(2), pages 443-77, May.
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Cited by:
  1. Attanasio, Orazio & Augsburg, Britta & de Haas, Ralph & Fitzsimons, Emla & Harmgart, Heike, 2014. "Group lending or individual lending? Evidence from a randomised field experiment in Mongolia," Discussion Papers, Research Unit: Economics of Change SP II 2014-303, Social Science Research Center Berlin (WZB).
  2. Giné, Xavier & Karlan, Dean S., 2014. "Group versus individual liability: Short and long term evidence from Philippine microcredit lending groups," Journal of Development Economics, Elsevier, Elsevier, vol. 107(C), pages 65-83.

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