2006-09-30 papers

on Microfinance

Issue of 2006‒09‒30
three papers chosen by
Aastha Pudasainee and Olivier Dagnelie

Joint Liability Lending in Microcredit Markets with Adverse Selection: a Survey By Alessandro Fedele
Technology Replaces Culture in Microcredit Markets: the Case of Italian MAGs By Alessandro Fedele; Federica Calidoni Lundberg
Access to credit by the poor in South Africa: Evidence from Household Survey Data 1995 and 2000 By Francis Nathan Okurut

Joint Liability Lending in Microcredit Markets with Adverse Selection: a Survey

By:	Alessandro Fedele
Abstract:	This paper reviews recent literature on joint liability lending in microcredit markets characterized by adverse selection. This mode of lending consists of granting individual loans to wealthless borrowers provided that they form groups: if a group does not fully repay its obligations, then the microlender cut off all members from future credit until the debt is repaid. Joint liability lending is able to extract information through a peer selection mechanism, with the effect of raising both repayment rates and welfare with respect to individual lending.
Keywords:	microcredit, underdeveloped economies, joint liability lending.
JEL:	D82 L31 O12 O16
Date:	2006–09
URL:	http://d.repec.org/n?u=RePEc:mis:wpaper:20060901&r=mfd

Technology Replaces Culture in Microcredit Markets: the Case of Italian MAGs

By:	Alessandro Fedele; Federica Calidoni Lundberg
Abstract:	We collect data from three Italian microcredit institutions, MAG2, MAG4 and MAG6, which operate in Milan, Turin and Reggio Emilia respectively, by targeting two categories of wealthless borrowers: single entrepreneurs and organizations (cooperatives and associations). Evidence shows that organizations repay with higher probability and are charged a lower average interest rate than individuals. We use these findings to construct a lending scheme which consists of granting loans provided that borrowers form production teams (i.e. organizations). We consider a microcredit market with adverse selection à la De Meza-Webb and we verify that both repayment rate and welfare increase, while interest rate falls with respect to individual lending if the above scheme, which we refer to as production team lending, is implemented. Our instrument, like joint liability implemented in rural economies, is able to extract information from borrowers through a peer selection mechanism but, differently from joint liability, fits to urban contexts where borrowers do not know each other and social sanctions are weak.
Keywords:	microcredit, urban areas, production team lending.
JEL:	D82 L31 O12 O16
Date:	2006–09
URL:	http://d.repec.org/n?u=RePEc:mis:wpaper:20060902&r=mfd

Access to credit by the poor in South Africa: Evidence from Household Survey Data 1995 and 2000

By:	Francis Nathan Okurut (Department of Economics, University of Botswana)
Abstract:	This study specifically investigated the factors that influenced access by the poor and Blacks to credit in the segmented financial sector in South Africa, using income and expenditure survey data from 1995 and 2000. The study sheds light on the extent of financial sector deepening through household participation especially among the poor and Blacks, in the context of the fight against poverty. In this study, three types of credit were identified. Formal credit was defined to include debts from commercial banks (including mortgage finance and car loans), semi-formal credit included consumption credit (for household assets such as furniture and open accounts in retail stores), and informal credit specifically referred to debts from relatives and friends.Multinomial logit models and Heckman probit models with sample selection were used for analytical work. The results suggest that the poor and Blacks have limited access to the formal and semi-formal financial sectors. At the national level, access to bank credit is positively and significantly influenced by age, being male, household size, education level, household per capita expenditure and race (being Coloured, Indian or White). Being poor has a negative and significant effect on formal credit access. Semi-formal credit access is positively and significantly influenced by household size, per capita expenditure, provincial location (Eastern Cape, Northern Cape, Free State and North West) and being Coloured. The negative and significant factors in determining access to semi-formal credit include being male, rural location, being poor and being White. Informal credit access is negatively and significantly influenced by education level and race (being Coloured or White). Among the poor, access to bank credit is positively and significantly influenced by being male, provincial location (Western Cape, Gauteng and Mpumalanga) and being Coloured. Access to semi-formal credit is positively and significantly determined by household per capita expenditure, provincial location (Western Cape, Northern Cape, North West and Gauteng) and being Indian. Access to informal credit by the poor is positively and significantly influenced by provincial location (Kwazulu Natal and Gauteng). Within the black population, access to bank credit is positively and significantly influenced by age, being male, household per capita expenditure and education level. Semi-formal credit access by Blacks is positively and significantly influenced by household size, household per capita expenditure, education level and provincial location (Eastern Cape, Northern Cape, Free State and North West). However being male, poor and located in a rural area negatively affected access to semi-formal credit by Blacks. Informal credit access by Blacks is negatively influenced by education level, but positively influenced by being located in the Western and Eastern Cape. These findings confirm that improving access to organized credit markets (i.e formal and semi-formal credit markets) by the poor and Blacks, remains important in the fight against poverty.
Keywords:	credit, poverty, South Africa
JEL:	N27 D14 G2
Date:	2006
URL:	http://d.repec.org/n?u=RePEc:sza:wpaper:wpapers27&r=mfd

This issue is ©2006 by Aastha Pudasainee and Olivier Dagnelie. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.

General information on the NEP project can be found at https://nep.repec.org. For comments please write to the director of NEP, Marco Novarese at <director@nep.repec.org>. Put “NEP” in the subject, otherwise your mail may be rejected.

NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.