Group lending as a mechanism for self-insuring default risk

Andreas Krause ()
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Andreas Krause: University of Bath

Annals of Finance, 2025, vol. 21, issue 1, No 5, 97-106

Abstract: Abstract We show that banks can provide loans at low costs to high-risk borrowers in the form of a group lending contract in which all members are jointly liable for their loans. By providing such contracts borrowers self-insure against some of the default risk the bank faces. We determine the optimal group size in a competitive banking system and find that it is reasonably small and borrowers internalize an increasing fraction of the risk the higher their risks are.

Keywords: Microfinance; Group lending; Joint liability; Self-insurance (search for similar items in EconPapers)
JEL-codes: D82 G21 O16 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10436-024-00447-4

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