Defining Social Collateral in Microfinance Group Lending

Luminita Postelnicu, Niels Hermes () and Ariane Szafarz

No 13-050, Working Papers CEB from ULB -- Universite Libre de Bruxelles

Abstract: Microfinance group lending with joint liability allows asset-poor individuals to replace physical collateral by social collateral. The literature on microfinance lacks a rigid framework for analyzing the consequences of using social collateral for borrowing behavior and repayment. This paper fills the gap by providing a theoretical framework to evaluate the impact of social collateral pledged by group borrowers on group lending repayment. Our approach is novel as we take into account the external ties of group borrowers, i.e. the social ties linking borrowers to non-borrowers from their community, whereas previous work in this field has looked solely at internal ties (i.e. between group members). One of the important features of our model is that we stress the impact of network configuration on the amount of social collateral pledged. Our model shows why the group lending methodology works better in rural areas than in urban areas, namely because rural social networks are typically denser than urban ones, which results in higher social collateral.

Keywords: Social Capital; Social Collateral; Group Lending; Repayment Performance (search for similar items in EconPapers)
JEL-codes: D71 D82 D85 G21 O16 O18 Z13 (search for similar items in EconPapers)
Pages: 31 p.
Date: 2013-12-19
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Chapter: Defining Social Collateral in Microfinance Group Lending (2014)
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