New Economics Papers
on Microfinance
Issue of 2007‒03‒24
five papers chosen by
Aastha Pudasainee and Olivier Dagnelie

  1. Group versus Individual Liability: A Field Experiment in the Philippines By Giné, Xavier; Karlan, Dean S.
  2. Female Empowerment: Impact of a Commitment Savings Product in the Philippines By Ashraf, Nava; Karlan, Dean S.; Yin, Wesley
  3. Social Connections and Group Banking By Karlan, Dean S.
  4. Promoting access to credit for small uncollateralized producers: moral hazard, subsidies and local externalities under different group lending market structures, By BECCHETTI LEONARDO; PISANI FABIO
  5. The development of trust and social capital in rural Uganda: An experimental approach. By Paul Mosley; Arjan Verschoor

  1. By: Giné, Xavier; Karlan, Dean S.
    Abstract: Group liability is often portrayed as the key innovation that led to the explosion of the microcredit movement, which started with the Grameen Bank in the 1970s and continues on today with hundreds of institutions around the world. Group lending claims to improve repayment rates and lower transaction costs when lending to the poor by providing incentives for peers to screen, monitor and enforce each other’s loans. However, some argue that group liability creates excessive pressure and discourages good clients from borrowing, jeopardizing both growth and sustainability. Therefore, it remains unclear whether group liability improves the lender’s overall profitability and the poor’s access to financial markets. We worked with a bank in the Philippines to conduct a field experiment to examine these issues. We randomly assigned half of the 169 pre-existing group liability 'centres' of approximately twenty women to individual-liability centres (treatment) and kept the other half as-is with group liability (control). We find that the conversion to individual liability does not affect the repayment rate, and leads to higher growth in centre size by attracting new clients.
    Keywords: group liability; informal economies; joint liability; micro-enterprises; microfinance; social capital
    JEL: C93 D71 D82 D91 O12 O16 O17
    Date: 2007–03
  2. By: Ashraf, Nava; Karlan, Dean S.; Yin, Wesley
    Abstract: Female 'empowerment' has increasingly become a policy goal, both as an end to itself and as a means to achieving other development goals. Microfinance in particular has often been argued, but not without controversy, to be a tool for empowering women. Here, using a randomized controlled trial, we examine whether access to an individually-held commitment savings product leads to an increase in female decision-making power within the household. We find positive impacts, particularly for women who have below median decision-making power in the baseline, and we find this leads to a shift towards female-oriented durables goods purchased in the household.
    Keywords: commitment; female empowerment; household decision making; microfinance; savings
    JEL: D12 D63 D91 J16 O12 O16
    Date: 2007–03
  3. By: Karlan, Dean S.
    Abstract: Lending to the poor is expensive due to high screening, monitoring, and enforcement costs. Group lending advocates believe lenders overcome this by harnessing social connections. Using data from FINCA-Peru, I exploit a quasi random group formation process to find evidence of peers successfully monitoring and enforcing joint-liability loans. Individuals with stronger social connections to their fellow group members (i.e., either living closer or being of a similar culture) have higher repayment and higher savings. Furthermore, I observe direct evidence that relationships deteriorate after default, and that through successful monitoring, individuals know who to punish and who not to punish after default.
    Keywords: group lending; informal savings; microfinance; social capital
    JEL: O12 O16 O17 Z13
    Date: 2007–03
    Abstract: We analyse equilibrium borrowers’ effort and cost of loan in microcredit in presence of moral hazard, project correlation and subsidies under group lending. Our results show that symmetric (asymmetric) project correlation has no (has significant) effects on borrowers’ effort, while subsidised lending raises it. These findings document that the well known negative effect of within group (symmetric) project correlation on group lending with joint liability disappears once endogenous effort is taken into account. We also analyse the effects of subsidised lending (and asymmetric correlation) on the relative convenience (in terms of borrowers’ effort) of the alternative i) between group lending and individual lending with notional collateral, ii) among three different market structures of the microfinance industry.
    Date: 2007–02
  5. By: Paul Mosley; Arjan Verschoor (Department of Economics, The University of Sheffield)
    Abstract: Trust is important for development but can be hard to build. In this paper, we report on experiments designed to understand the determinants of trust in villages in eastern Uganda, and in particular whether trust can be `built´ by offering insurance to people as a protection against the possibility that the trust they offer will not be reciprocated. We find, firstly, that the effects of income and wealth on trust are ambiguous: trust is higher in the richer than the poorer village, but once association and female education are added as explanatory variables, the wealth effect disappears. Secondly, although the offer of insurance is taken up by a majority of players, this is in most cases not an `effective demand´ in the sense of incentivising higher levels of trust. Effective demand for insurance, defined in this way, however responds positively to high levels of risk efficacy, microfinance membership and female education. Insurance offered in this form, therefore, is on its own apparently not a reliable technology for building trust; but its effectiveness as a trust-building instrument appears to increase if certain complementary institutions are in position.
    Keywords: Trust, Social Capital, Insurance, Uganda
    JEL: O12 O16 C93
    Date: 2005–06

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