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Group-lending: Sequential financing, lender monitoring and joint liability

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  • Prabal Roy Chowdhury

    (Indian Statistical Institute, New Delhi)

Abstract

We develop a simple model of group-lendingbased on peer monitoring and moral hazard. We find that, in the absence of sequential financing or lender monitoring, group-lending schemes may involve under-monitoring with the borrowers investing in undesirable projects. Moreover, under certain parameter configurations, group-lending schemes involving either sequential financing, or a combination of lender monitoringand joint liability are feasible. In fact, group-lending schemes with sequential financing may succeed even in the absence of joint liability, though the repayment rate will be lower. In the absence of joint liability, however, group-lending with lender monitoring is unlikely to be feasible.

Suggested Citation

  • Prabal Roy Chowdhury, 2003. "Group-lending: Sequential financing, lender monitoring and joint liability," Discussion Papers 04-10, Indian Statistical Institute, Delhi.
    • Handle: RePEc:alo:isipdp:04-10
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    References listed on IDEAS

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    Cited by:

    1. Joel M. Guttman, 2006. "Repayment Performance in Group Lending Programs: A Survey," NFI Working Papers 2006-WP-01, Indiana State University, Scott College of Business, Networks Financial Institute.
    2. Mariya Pylypiv & Sugato Chakravarty, 2013. "The Role of Subsidization and Organizational Status on Borrower Repayment Rates in Microfinance Institutions," Working Papers 1018, Purdue University, Department of Consumer Sciences.

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    More about this item

    Keywords

    Group-lending; joint liability; peer monitoring; sequential financing; under-monitoring; lender monitoring;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • O2 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy

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