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Repayment Incentives And The Distribution Of Gains From Group Lending

  • Jean-Marie Baland

    (University of Namur)

  • Rohini Somanathan

    (Department of Economics, Delhi School of Economics & Institute for Advanced Study, Princeton)

  • Zaki Wahhaj

    (University of Oxford)

Group loans with joint liability have been a distinguishing feature of many micro nance programs. While such lending has bene tted millions of borrowers, major lending insti- tutions have acknowledged their limited impact among the very poor and have recently favored individual contracts. This paper attempts to understand these empirical patterns using a model in which there is a single investment project and access to credit is limited by weak repayment incentives. We show that in the absence of large social sanctions, the poorest borrowers are o ered individual and not group contracts. When both types of contracts are feasible, the relative gains from group loans are shown to be decreasing in loan size. We compare the role of bank enforcement with social sanctions and nd that bank enforcement is more e ective in increasing outreach while social sanctions raise the welfare of infra-marginal borrowers. Finally, we explore the welfare e ects of group size and nd that those requiring small loans are better served by larger groups but group size e ects are, in general, ambiguous.

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Paper provided by Centre for Development Economics, Delhi School of Economics in its series Working papers with number 192.

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Length: 24 pages
Date of creation: Nov 2010
Date of revision:
Handle: RePEc:cde:cdewps:192
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  1. Xavier Giné & Dean Karlan, 2009. "Group versus Individual Liability: Long Term Evidence from Philippine Microcredit Lending Groups," Working Papers 970, Economic Growth Center, Yale University.
  2. Klaus Abbink & Bernd Irlenbusch & Elke Renner, 2006. "Group Size and Social Ties in Microfinance Institutions," Economic Inquiry, Western Economic Association International, vol. 44(4), pages 614-628, October.
  3. Ashok S. Rai & Tomas Sj�str�m, 2004. "Is Grameen Lending Efficient? Repayment Incentives and Insurance in Village Economies," Review of Economic Studies, Oxford University Press, vol. 71(1), pages 217-234.
  4. Dean Karlan & Jonathan Zinman, 2005. "Observing unobservables: identifying information asymmetries with a consumer-credit field experiment," Proceedings 961, Federal Reserve Bank of Chicago.
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  10. Jeremy Bulow & Kenneth Rogoff, 1998. "Sovereign Debt: Is to Forgive to Forget," Levine's Working Paper Archive 209, David K. Levine.
  11. de Quidt, Jonathan & Fetzer, Thiemo & Ghatak, Maitreesh, 2012. "Market Structure and Borrower Welfare in Microfinance," CEPR Discussion Papers 9165, C.E.P.R. Discussion Papers.
  12. Bhole, Bharat & Ogden, Sean, 2010. "Group lending and individual lending with strategic default," Journal of Development Economics, Elsevier, vol. 91(2), pages 348-363, March.
  13. Ashok S. Rai & Tomas Sj–str–m, 2004. "Is Grameen Lending Efficient? Repayment Incentives and Insurance in Village Economies," Review of Economic Studies, Wiley Blackwell, vol. 71(1), pages 217-234, 01.
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  15. Dewan, Isha & Somanathan, Rohini, 2011. "The application of nonparametric tests to poverty targeting," Economics Letters, Elsevier, vol. 113(1), pages 58-61, October.
  16. Karlan, Dean & Gine, Xavier, 2009. "Group versus Individual Liability: Long Term Evidence from Philippine Microcredit Lending Groups," Working Papers 61, Yale University, Department of Economics.
  17. Galor, Oded & Zeira, Joseph, 1988. "Income Distribution and Macroeconomics," MPRA Paper 51644, University Library of Munich, Germany, revised 01 Sep 1989.
  18. Besley, T. & Coate, S., 1991. "Group Lending, Repayment Incentives And Social Collateral," Papers 152, Princeton, Woodrow Wilson School - Development Studies.
  19. Matsuyama, Kiminori, 2000. "Endogenous Inequality," Review of Economic Studies, Wiley Blackwell, vol. 67(4), pages 743-59, October.
  20. Hermes, Niels & Lensink, Robert, 2011. "Microfinance: Its Impact, Outreach, and Sustainability," World Development, Elsevier, vol. 39(6), pages 875-881, June.
  21. Jonathan Morduch, 1998. "Does Microfinance Really Help the Poor? New Evidence from Flagship Programs in Bangladesh," Working Papers 198, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
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