| 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. |