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Determinants of Moral hazard in Microfinance: Empirical Evidence from Joint Liability Lending Schemes in Malawi

  • Simtowe, Franklin
  • Zeller, Manfred
  • Phiri, Alexander

Moral hazard is widely reported as a problem in credit and insurance markets, mainly arising from information asymmetry. Although theorists have attempted to explain the success of Joint Liability Lending (JLL) schemes in mitigating moral hazard, empirical studies are rare. This paper investigates the determinants of moral hazard among JLL schemes from Malawi, using group level data from 99 farm and non-farm credit groups. Results reveal that peer selection, peer monitoring, peer pressure, dynamic incentives and variables capturing the extent of matching problems explain most of the variation in the incidence of moral hazard among credit groups. The implications are that Joint Liability Lending institutions will continue to rely on social cohesion and dynamic incentives as a means to enhancing their performance which has a direct implication on their outreach, impact and sustainability.

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File URL: http://purl.umn.edu/25287
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Paper provided by International Association of Agricultural Economists in its series 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia with number 25287.

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Date of creation: 2006
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Handle: RePEc:ags:iaae06:25287
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  1. Guinnane, T.W., 1992. "A Failed Institutional Transplant: Raiffeisen's Credit Cooperatives in Ireland, 1894-1914," Papers 165, Princeton, Woodrow Wilson School - Development Studies.
  2. Ghatak, M. & Guinnane, T.W., 1998. "The Economics of Lending with Joint Liability: Theory and Practice," Papers 791, Yale - Economic Growth Center.
  3. Che Yeon-Koo, 2002. "Joint Liability and Peer Monitoring under Group Lending," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 2(1), pages 1-28, July.
  4. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
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