Determinants of Moral Hazard in Microfinance: Empirical Evidence from Joint Liability Lending Programs in Malawi

Franklin Simtowe and Manfred Zeller

MPRA Paper from University Library of Munich, Germany

Abstract: Moral hazard is widely reported as a problem in credit and insurance markets, mainly arising from information asymmetry. Although theorists have attempted to explain how group lending with joint liability can be an important tool for mitigating moral hazard among the poor, empirical studies are rare and sometimes give mixed results. In Malawi, for example, although, group lending with joint liability has been practiced for nearly four decades, the unwillingness to repay loans remains the single major cause of default. This paper examines the extent of occurrence of moral hazard and investigates its determinants of occurrence among joint liability lending programs from Malawi, using group level data from 99 farm and non-farm credit groups. Results reveal that peer selection, peer monitoring, peer pressure, dynamic incentives and variables capturing the extent of matching problems explain most of the variation in the incidence of moral hazard among credit groups. The implications are that joint liability lending institutions will continue to rely on social cohesion and dynamic incentives as a means to enhancing their performance which has a direct implication on their outreach, impact and sustainability.

Keywords: moral hazard; joint liability; dynamic incentives; group lending; Malawi (search for similar items in EconPapers)
JEL-codes: M20 M21 (search for similar items in EconPapers)
Date: 2006-10-12
New Economics Papers: this item is included in nep-afr, nep-agr, nep-dev, nep-ias, nep-mfd and nep-soc
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:461

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