nep-mfd New Economics Papers
on Microfinance
Issue of 2006‒02‒26
two papers chosen by
Ana Ogarrio
Kennedy School, Harvard University

  1. Collateral and Risk Sharing in group lending: evidence from an urban microcredit program By Maurice Kugler; Rossella Oppes
  2. Banking with sentiments. A model of fiduciary interactions in micro-credit programs By Vittorio Pelligra

  1. By: Maurice Kugler; Rossella Oppes
    Abstract: Empirical research on the impact and determinants of group lending is by now substantial. However, very little is known about the possible role of collateral to mitigate incentive problems in group lending. This is because microcredit programs have normally been implemented in rural areas of developing countries. Indeed, the reason for this choice is lack of credit access since agents with collateral are very rare. Also, to the extent that rural communities have tight-knit hierarchical structures information about borrowers is accessible and the enforcement of sanctions via social networks makes collateral superfluous for default mitigation. Yet, in an urban setting in which information is more atomized and social sanctions are not as powerful, collateral may have an important role in group lending. First, we illustrate in a model the role of collateral to mitigate group default. Second, we use data from a group lending program implemented in 2001 in Cotonou, the largest city in Benin with more than one million inhabitants. We empirically explore the risk profile of individual borrowers and resulting group heterogeneity to identify the role of personal contributions to investment projects. Our evidence suggests that while diversification within groups facilitates risk pooling, it also increases expected bailout or group default costs for low risk borrowers. Collateral helps offset and alleviate potential negative spillovers from group default induced by membership of borrowers with risky projects. The presence of borrowers with collateral facilitates access to credit for group members without collateral, who in turn provide insurance against group default. We find joint liability to be a mechanism for risk sharing in a setting where poor households lack resources for collateral and insurance markets are missing.
    Keywords: Group lending, mutual cosigners, collateral, risk sharing, strategic
    JEL: O12 O17 G20 D82
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:cns:cnscwp:200509&r=mfd
  2. By: Vittorio Pelligra
    Abstract: The success of many micro-credit initiatives is difficult to account for in the traditional economic framework, where, mainly because of the assumption of self-interested behaviour, credit is rationed and provided only to those able to back it with collaterals. Having analysed different alternative explanations for such a success, the paper introduces the concept of trust responsiveness in the lender-borrower relationship and formalises it in a psychological game-theoretical model aimed at explaining the unusually high rate of repayment experienced in micro-credit programs. Three well-known psychological effects are introduced to discuss the factors that may positively or negatively affect borrowers’ trustworthiness. This model provides important normative implications for institutional design.
    Keywords: Microfinance; Trust responsiveness; Psychological Game Theory
    JEL: C72 O12
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:cns:cnscwp:200503&r=mfd

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