| Abstract: |
Moral hazard is widely reported as a problem in credit and insurance markets,
mainly arising from information asymmetry. Although theorists have attempted
to explain how group lending with joint liability can be an important tool for
mitigating moral hazard among the poor, empirical studies are rare and
sometimes give mixed results. In Malawi, for example, although, group lending
with joint liability has been practiced for nearly four decades, the
unwillingness to repay loans remains the single major cause of default. This
paper examines the extent of occurrence of moral hazard and investigates its
determinants of occurrence among joint liability lending programs from Malawi,
using group level data from 99 farm and non-farm credit groups. Results reveal
that peer selection, peer monitoring, peer pressure, dynamic incentives and
variables capturing the extent of matching problems explain most of the
variation in the incidence of moral hazard among credit groups. The
implications are that joint liability lending institutions will continue to
rely on social cohesion and dynamic incentives as a means to enhancing their
performance which has a direct implication on their outreach, impact and
sustainability. |