Borrower Empowerment and Savings: A Two-stage Micro-finance Scheme

Prabal Roy Chowdhury ()

MPRA Paper from University Library of Munich, Germany

Abstract: We consider group-lending with joint liability where the provision of loans is conditional on prior savings. In a dynamic model with moral hazard and endogenous group-formation, we examine the effect of such schemes on the allocation of loans between strongly and weakly empowered borrowers. We find that he savings requirement may help to screen out weak borrowers. Further, as long as the borrowers are not too similar, it increases the incentive for ``positive assortative matching (PAM).'' For intermediate interest rates, group-lending leads to ``PAM'' with a screening out of weak borrowers. It is thus feasible, whereas individual lending, which does not allow for such screening, is not. Interestingly, for relatively high interest rates, individual lending may dominate group-lending.

Keywords: Assortative matching; empowered borrowers; joint liability lending; savings. (search for similar items in EconPapers)
JEL-codes: O12 O20 O15 O17 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev, nep-lab and nep-mfd
Date: 2007-06
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