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Group Lending Without Joint Liability

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

This paper contrasts individual liability lending with and without groups to joint liability lending. By doing so, we shed light on an apparent shift away from joint liability lending towards individual liability lending by some microfinance institutions First we show that individual lending with or without groups may constitute a welfare improvement so long as borrowers have sufficient social capital to sustain mutual insurance. Second, we explore how a purely mechanical argument in favor of the use of groups - namely lower transaction costs - may actually be used explicitly by lenders to encourage the creation of social capital. We also carry out some simulations to evaluate quantitatively the welfare impact of alternative forms of lending, and how they relate to social capital.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9578.

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Date of creation: Jul 2013
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Handle: RePEc:cpr:ceprdp:9578
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  1. Thiemo Fetzer & Maitreesh Ghatak & Jonathan de Quidt, 2012. "Market Structure and Borrower Welfare in Microfinance," STICERD - Economic Organisation and Public Policy Discussion Papers Series 40, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  2. Robert Cull & Asli Demirgüç-Kunt & Jonathan Morduch, 2009. "Microfinance Meets the Market," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 167-92, Winter.
  3. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
  4. Maitreesh Ghatak & Timothy W. Guinnane, 1998. "The Economics of Lending with Joint Liability: Theory and Practice," Discussion Papers 98-16, University of Copenhagen. Department of Economics.
  5. Jean-Jacques Laffont, 2000. "Collusion and Group Lending with Adverse Selection," Development Working Papers 147, Centro Studi Luca d\'Agliano, University of Milano.
  6. Attanasio, Orazio & Augsburg, Britta & De Haas, Ralph & Fitzsimons, Emla & Harmgart, Heike, 2011. "Group lending or individual lending? Evidence from a randomised field experiment in Mongolia," MPRA Paper 35439, University Library of Munich, Germany.
  7. Baland, Jean-Marie & Somanathan, Rohini & Wahhaj, Zaki, 2013. "Repayment incentives and the distribution of gains from group lending," Journal of Development Economics, Elsevier, vol. 105(C), pages 131-139.
  8. Beatriz Armendáriz & Jonathan Morduch, 2010. "The Economics of Microfinance, Second Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262513986, June.
  9. Glaeser, Edward L. & Shleifer, Andrei, 2001. "Not-for-profit entrepreneurs," Journal of Public Economics, Elsevier, vol. 81(1), pages 99-115, July.
  10. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, vol. 46(1), pages 1-18, February.
  11. Suresh de Mel & David McKenzie & Christopher Woodruff, 2008. "Returns to Capital in Microenterprises: Evidence from a Field Experiment," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1329-1372, November.
  12. Christian Ahlin & Robert Townsend, 2002. "Using Repayment Data to Test Across Models of Joint Liability Lending," Vanderbilt University Department of Economics Working Papers 0227, Vanderbilt University Department of Economics.
  13. Laffont, Jean-Jacques & Rey, Patrick, 2003. "Moral Hazard, Collusion and Group Lending," IDEI Working Papers 122, Institut d'Économie Industrielle (IDEI), Toulouse.
  14. Chowdhury, Prabal Roy, 2005. "Group-lending: Sequential financing, lender monitoring and joint liability," Journal of Development Economics, Elsevier, vol. 77(2), pages 415-439, August.
  15. Jain, Sanjay & Mansuri, Ghazala, 2003. "A little at a time: the use of regularly scheduled repayments in microfinance programs," Journal of Development Economics, Elsevier, vol. 72(1), pages 253-279, October.
  16. 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.
  17. Ahlin, Christian & Jiang, Neville, 2008. "Can micro-credit bring development?," Journal of Development Economics, Elsevier, vol. 86(1), pages 1-21, April.
  18. McIntosh, Craig & Wydick, Bruce, 2005. "Competition and microfinance," Journal of Development Economics, Elsevier, vol. 78(2), pages 271-298, December.
  19. Greg Fischer & Maitreesh Ghatak, 2010. "Repayment Frequency in Microfinance Contracts with Present-Biased Borrowers," STICERD - Economic Organisation and Public Policy Discussion Papers Series 021, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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