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Group Lending Model - A Panacea to Reduce Transaction Cost?

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  • Sudhir Sharma Priti Singh Kratika Singh Bhawana Chauhan

    (Department of Economics, Chaudhary Charan Singh University, Meerut (UP) India Department of Economics, Chaudhary Charan Singh University, Meerut (UP) India Department of Economics, Chaudhary Charan Singh University, Meerut (UP) India Department of Economics, Chaudhary Charan Singh University, Meerut (UP) India)

Abstract

Microfinance institutions (MFIs) have stepped up towards commercialization and sustainability yet they face challenges in terms of transaction cost that limit their growth prospects. Transaction cost is incurred in forming the group of members, searching for the potential clients, monitoring, and administration, in providing training to the clients etc. Group lending has emerged as an effective tool in reducing this cost by transferring its burden on the group. Though the concept of group lending is not new in micro finance but in India it was introduced by NABARD in 2004-05 owing to its key advantage of income generation. This paper aims to analyze whether group lending programme has some role to play in reducing transaction cost of MFIs. It also discusses the concept of transaction cost, characteristics of group lending as well as process of forming a group. The results reveal that internal management of small and medium MFIs is not working efficiently which results in increased costs. Large MFIs do not face such problems. JEL Classification: O, O1, O10

Suggested Citation

  • Sudhir Sharma Priti Singh Kratika Singh Bhawana Chauhan, 2017. "Group Lending Model - A Panacea to Reduce Transaction Cost?," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 20(2), pages 46-63, November.
    • Handle: RePEc:zag:zirebs:v:20:y:2017:i:2:p:46-63
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    References listed on IDEAS

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    1. de Aghion, Beatriz Armendariz & Gollier, Christian, 2000. "Peer Group Formation in an Adverse Selection Model," Economic Journal, Royal Economic Society, vol. 110(465), pages 632-643, July.
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    Cited by:

    1. Marthe Uwamariya & Claudia Loebbecke & Stefan Cremer, 2019. "Mobile Banking Impacting the Performance of Microfinance Institutions: A Case Study from Rwanda," International Journal of Innovation and Technology Management (IJITM), World Scientific Publishing Co. Pte. Ltd., vol. 17(01), pages 1-18, December.

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    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

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