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Group Lending Without Joint Liability

Author

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

Abstract

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.

Suggested Citation

  • de Quidt, Jonathan & Fetzer, Thiemo & Ghatak, Maitreesh, 2013. "Group Lending Without Joint Liability," CEPR Discussion Papers 9578, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9578
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Jean-Marie Baland & Rohini Somanathan & Lore Vandewalle, 2011. "Socially Disadvantaged Groups and Microfinance in India," Working Papers 1117, University of Namur, Department of Economics.
    2. Ahlin, Christian & Waters, Brian, 2016. "Dynamic microlending under adverse selection: Can it rival group lending?," Journal of Development Economics, Elsevier, vol. 121(C), pages 237-257.
    3. Baland, Jean-Marie & Gangadharan, Lata & Maitra, Pushkar & Somanathan, Rohini, 2017. "Repayment and exclusion in a microfinance experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 137(C), pages 176-190.
    4. Allen, Treb, 2016. "Optimal (partial) group liability in microfinance lending," Journal of Development Economics, Elsevier, vol. 121(C), pages 201-216.
    5. Lucia, Dalla Pellegrina & Angela, De Michele & Giorgio, Di Maio & Paolo, Landoni & Susanna, Parravicini, 2017. "Group meeting frequency and borrowers’ repayment performance in microfinance: Evidence from a quasi-natural experiment in South Africa," Working Papers 374, University of Milano-Bicocca, Department of Economics, revised 30 Nov 2017.
    6. Mahreen Mahmud, 2015. "Repaying Microcredit Loans: A Natural Experiment on Liability Structure," Studies in Economics 1509, School of Economics, University of Kent.
    7. Jean-Marie Baland & Rohini Somanathan & Zaki Wahhaj, 2014. "Group Lending and Endogenous Social Sanctions," Studies in Economics 1415, School of Economics, University of Kent.
    8. Attanasio, O. & Augsburg, B. & de Haas, Ralph, 2016. "Microcredit Contracts, Risk Diversification and Loan Take-Up," Discussion Paper 2016-020, Tilburg University, Center for Economic Research.

    More about this item

    Keywords

    group lending; joint liability; micro finance; mutual insurance;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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