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Group lending without joint liability

Author

Listed:
  • de Quidt, Jonathan
  • Fetzer, Thiemo
  • Ghatak, Maitreesh

Abstract

This paper contrasts individual liability lending with and without groups to joint liability lending. We are motivated by an apparent shift away from the use of joint liability by microfinance institutions, combined with recent evidence that a) converting joint liability groups to individual liability groups did not affect repayment rates, and b) an intervention that increased social capital in individual liability borrowing groups led to improved repayment performance. First, we show that individual lending with or without groups may constitute a welfare improvement over joint liability, so long as borrowers have sufficient social capital to sustain mutual insurance. Second, we explore how the lender's lower transaction costs in group lending can encourage insurance by reducing the amount borrowers have to pay to bail one another out. Third, we discuss how group meetings might encourage insurance, either by increasing the incentive to invest in social capital, or because the time spent in meetings can facilitate setting up insurance arrangements. Finally, we perform a simple simulation exercise, evaluating quantitatively the welfare impacts of alternative forms of lending and how they relate to social capital.

Suggested Citation

  • de Quidt, Jonathan & Fetzer, Thiemo & Ghatak, Maitreesh, 2016. "Group lending without joint liability," Journal of Development Economics, Elsevier, vol. 121(C), pages 217-236.
  • Handle: RePEc:eee:deveco:v:121:y:2016:i:c:p:217-236
    DOI: 10.1016/j.jdeveco.2014.11.006
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Jean-Marie Baland & Rohini Somanathan & Lore Vandewalle, 2011. "Socially Disadvantaged Groups and Microfinance in India," Working Papers 1117, University of Namur, Department of Economics.
    2. Ahlin, Christian & Waters, Brian, 2016. "Dynamic microlending under adverse selection: Can it rival group lending?," Journal of Development Economics, Elsevier, vol. 121(C), pages 237-257.
    3. Baland, Jean-Marie & Gangadharan, Lata & Maitra, Pushkar & Somanathan, Rohini, 2017. "Repayment and exclusion in a microfinance experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 137(C), pages 176-190.
    4. Allen, Treb, 2016. "Optimal (partial) group liability in microfinance lending," Journal of Development Economics, Elsevier, vol. 121(C), pages 201-216.
    5. Lucia, Dalla Pellegrina & Angela, De Michele & Giorgio, Di Maio & Paolo, Landoni & Susanna, Parravicini, 2017. "Group meeting frequency and borrowers’ repayment performance in microfinance: Evidence from a quasi-natural experiment in South Africa," Working Papers 374, University of Milano-Bicocca, Department of Economics, revised 30 Nov 2017.
    6. Mahreen Mahmud, 2015. "Repaying Microcredit Loans: A Natural Experiment on Liability Structure," Studies in Economics 1509, School of Economics, University of Kent.
    7. Jean-Marie Baland & Rohini Somanathan & Zaki Wahhaj, 2014. "Group Lending and Endogenous Social Sanctions," Studies in Economics 1415, School of Economics, University of Kent.
    8. Attanasio, O. & Augsburg, B. & de Haas, Ralph, 2016. "Microcredit Contracts, Risk Diversification and Loan Take-Up," Discussion Paper 2016-020, Tilburg University, Center for Economic Research.

    More about this item

    Keywords

    Microfinance; Group lending; Joint liability; Mutual insurance;

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

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