Working Paper: CEPR ID: DP9578
Authors: Jonathan De Quidt; Thiemo Fetzer; Maitreesh Ghatak
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.
Keywords: group lending; joint liability; micro finance; mutual insurance
JEL Codes: G11; G21; O12; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Individual liability lending (G51) | Borrower welfare (G51) |
| Individual liability lending (G51) | Repayment performance (F34) |
| Explicit joint liability lending (G21) | Repayment performance (F34) |
| Lower transaction costs associated with group lending (D23) | Investment in social capital (H54) |
| Investment in social capital (H54) | Repayment rates (E43) |
| Low social capital (Z13) | Explicit joint liability performs better than implicit joint liability (D86) |
| High social capital (Z13) | Implicit joint liability performs better than explicit joint liability (K13) |
| Social capital (Z13) | Effectiveness of different lending methodologies (G21) |