Defining Social Collateral in Microfinance Group Lending

Luminita Postelnicu, Niels Hermes () and Ariane Szafarz

Chapter 10 in Microfinance Institutions, 2014, pp 187-207 from Palgrave Macmillan

Abstract: Abstract Microfinance institutions (MFIs) grant loans backed by social collateral to poor entrepreneurs whose incomes originate mostly from informal economic activities. As a consequence, MFIs are often committed to rely on soft information to assess borrowers’ credit-worthiness. Group lending with joint liability is seen as an effective instrument to circumvent information asymmetries because it incentivizes group members to use their social ties to screen, monitor, and enforce loan repayment on their peers. The social ties embed social capital and facilitate the collective actions of group members, allowing them to coordinate their repayment decisions and cooperate for their mutual benefit.

Keywords: Social Capital; Moral Hazard; Information Channel; Soft Information; Social Sanction (search for similar items in EconPapers)
Date: 2014
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Working Paper: Defining Social Collateral in Microfinance Group Lending (2013)
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DOI: 10.1057/9781137399663_10

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