Repayment incentives and the distribution of gains from group lending

Jean-Marie Baland, Rohini Somanathan and Zaki Wahhaj

Journal of Development Economics, 2013, vol. 105, issue C, 131-139

Abstract: Group loans with joint liability are a distinguishing feature of many microfinance programs. While such lending benefits millions of borrowers, major lending institutions acknowledge its limited impact among the very poor and have shifted towards individual loans. This paper attempts to explain this trend by exploring the relationship between borrower wealth and the benefits from group lending when access to credit is limited by strategic default. In our model, individuals of heterogeneous wealth face a given investment opportunity so poor investors demand larger loans. We show that the largest loan offered as an individual contract cannot be supported as a group loan. Joint liability cannot therefore extend credit outreach in the absence of additional social sanctions within groups. We also find that the benefits from group loans are increasing in borrower wealth and that optimal group size depends on project characteristics. By allowing for multi-person groups and wealth heterogeneity in the population, the paper extends the standard framework to analyze joint liability and contributes to an understanding of the conditions under which microcredit can reduce poverty.

Keywords: Microcredit; Joint-liability; Group lending; Repayment incentives; Social sanctions (search for similar items in EconPapers)
JEL-codes: G21 I38 O12 O16 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304387813001077
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Repayment incentives and the distribution of gains from group lending (2011)
Working Paper: REPAYMENT INCENTIVES AND THE DISTRIBUTION OF GAINS FROM GROUP LENDING (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:105:y:2013:i:c:p:131-139

DOI: 10.1016/j.jdeveco.2013.07.008

Access Statistics for this article

Journal of Development Economics is currently edited by M. R. Rosenzweig

More articles in Journal of Development Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().