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Repayment Performance in Microcredit Programs: Theory and Evidence

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  • Joel M. Guttman

Abstract

This paper revisits the conventional wisdom on the determinants of the success of microcredit programs. The paper first develops a simple moral hazard model of borrowing in a group lending context, and then tests this model using data from a survey conducted in Bangladesh in 1991-92. One of the predictions of the moral hazard model, regarding the effect of group size on repayment performance, is rejected by the empirical evidence. The paper then develops an alternative approach, which is consistent with the observed effect of group size as well as the other empirical results.

Suggested Citation

  • Joel M. Guttman, 2007. "Repayment Performance in Microcredit Programs: Theory and Evidence," NFI Working Papers 2007-WP-11, Indiana State University, Scott College of Business, Networks Financial Institute.
    • Handle: RePEc:nfi:nfiwps:2007-wp-11
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    References listed on IDEAS

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    1. Paxton, Julia & Graham, Douglas & Thraen, Cameron, 2000. "Modeling Group Loan Repayment Behavior: New Insights from Burkina Faso," Economic Development and Cultural Change, University of Chicago Press, vol. 48(3), pages 639-655, April.
    2. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
    3. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, vol. 46(1), pages 1-18, February.
    4. Zeller, Manfred, 1998. "Determinants of Repayment Performance in Credit Groups: The Role of Program Design, Intragroup Risk Pooling, and Social Cohesion," Economic Development and Cultural Change, University of Chicago Press, vol. 46(3), pages 599-620, April.
    5. Ghatak, Maitreesh & Guinnane, Timothy W., 1999. "The economics of lending with joint liability: theory and practice," Journal of Development Economics, Elsevier, vol. 60(1), pages 195-228, October.
    6. Sharma, Manohar & Zeller, Manfred, 1997. "Repayment performance in group-based credit programs in Bangladesh: An empirical analysis," World Development, Elsevier, vol. 25(10), pages 1731-1742, October.
    7. Stiglitz, Joseph E, 1990. "Peer Monitoring and Credit Markets," The World Bank Economic Review, World Bank, vol. 4(3), pages 351-366, September.
    8. 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.
    9. Van Tassel, Eric, 1999. "Group lending under asymmetric information," Journal of Development Economics, Elsevier, vol. 60(1), pages 3-25, October.
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    Cited by:

    1. Zahid Iqbal & Rai Imtiaz Hussain & Muhammad Ali & Hamna Sohail & Hafiz Fawad Ali, 2020. "A qualitative approach to determine the problems and challenges faced by microfinance institution with reference to poverty alleviation: A case of district Bahawal Nagar, Punjab, Pakistan," International Journal of Economics and Financial Issues, Econjournals, vol. 10(4), pages 192-197.
    2. Sofia Pereira & Paulo Mourao, 2012. "Why does the microcredit borrowing rate differ across countries? A cross‐country study," International Journal of Social Economics, Emerald Group Publishing Limited, vol. 39(8), pages 536-550, June.
    3. Bilau, José & St-Pierre, Josée, 2018. "Microcredit repayment in a European context: evidence from Portugal," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 85-96.
    4. Shahid Razzaque, 2019. "Choice of Microfinance Contracts and Repayment Rates under Individual Lending: An Artefactual Field Experiment from Pakistan," PIDE-Working Papers 2019:166, Pakistan Institute of Development Economics.
    5. Lucia dalla Pellegrina & Antonio Scollo, 2016. "The Role of Borrower-Cosigner Kinship Relations on Loan Default," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 2(3), pages 421-444, November.

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