Working Paper: CEPR ID: DP8197
Authors: Jean-Marie Baland; Rohini Somanathan; Zaki Wahhaj
Abstract: Group loans with joint liability have been a distinguishing feature of many microfinance programs. While such lending has benefitted millions of borrowers, major lending institutions 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 offered 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 find that bank enforcement is more effective in increasing outreach while social sanctions raise the welfare of infra-marginal borrowers. Finally, we explore the welfare effects of group size and find that those requiring small loans are better served by larger groups but group size effects are, in general, ambiguous.
Keywords: group lending; joint liability; microcredit; repayment incentives; social sanctions
JEL Codes: G21; I38; O12; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| strength of social sanctions (Z13) | type of loan offered (H81) |
| loan size (G51) | relative gains from group loans (H81) |
| bank enforcement (G21) | outreach (O36) |
| group size (C92) | borrower welfare (G51) |
| initial wealth distribution (D39) | distribution of gains from group lending (D39) |