New Economics Papers
on Microfinance
Issue of 2008‒11‒25
four papers chosen by
Aastha Pudasainee and Olivier Dagnelie

  1. Joint-liability borrowing decisions under risk: Empirical evidence from rural microfinance in Ethiopia By Berhane Tesfay, G.; Gardebroek, C.
  2. The Nature of Poverty and Its Prospects: Pakistan Evidence By Herani, Gobind M; Rajar , Allah Wasayo; Wasim, Mohammad Pervez; Shaikh, Riaz Ahmed
  3. Do Social Networks Solve Information Problems for Peer-to-Peer Lending? Evidence from By Seth Freedman; Ginger Zhe Jin;
  4. Group versus Individual Lending in Microfinance By Lehner, Maria

  1. By: Berhane Tesfay, G.; Gardebroek, C.
    Abstract: This paper investigates borrowing decisions of rural households from a microfinance in Tigray, Ethiopia using household panel data on 5 years and a dynamic panel probit model. The theoretical model takes two types of risk involved in jointliability lending explicitly into account: risk of partner failure and the risk of losing future access to credit. Empirical results show that these risks are important in explaining borrowing decisions. Another finding is that the probability of repeatborrowing is higher than the probability of new participation, with possible implications that perceived joint-liability threats deter participation and easing stringent punishments might help poor households€٠access to credit.
    Keywords: Microfinance, risk, dynamic panel probit, Financial Economics,
    Date: 2008
  2. By: Herani, Gobind M; Rajar , Allah Wasayo; Wasim, Mohammad Pervez; Shaikh, Riaz Ahmed
    Abstract: This paper analysis the reasons of poverty, and identifies reduction strategies developed in Pakistan and its consequences. This exploratory study uses the secondary data for the analysis. Much has been written on poverty reduction in Pakistan. So many strategies are prepared and implemented in Pakistan; we have identified and analyzed these and found that no one is successful, and in the light of these results, it needs further contribution for the reduction of poverty. Trends have remained uneven during the study period. It is found that in 1970s, poverty decreased due to increase in prices of farm output and increase in remittance. In 1980s poverty decreased due to zakat distribution, increase in remittance growth in construction and services sector. Again after 2000 it reduced and much change is seen due to introduction of Microcredit, Khushhali bank and massive spending on poverty related and social sector. In the end implication are made for the better results of strategies and planning.
    Keywords: Poverty Alleviation Strategies; Zakat Distribution ; Microcredit ; Remittance
    JEL: I31 I28 D14 G21 I32
    Date: 2008–09
  3. By: Seth Freedman (Department of Economics, University of Maryland); Ginger Zhe Jin (Department of Economics, University of Maryland);
    Abstract: This paper studies peer-to-peer (p2p) lending on the Internet., the first p2p lending website in the US, matches individual lenders and borrowers for unsecured consumer loans. Using transaction data from June 1, 2006 to July 31, 2008, we examine what information problems exist on Prosper and whether social networks help alleviate the information problems. As we expect, data identifies three information problems on First, Prosper lenders face extra adverse selection because they observe categories of credit grades rather than the actual credit scores. This selection is partially offset when Prosper posts more detailed credit information on the website. Second, many Prosper lenders have made mistakes in loan selection but they learn vigorously over time. Third, as Stiglitz and Weiss (1981) predict, a higher interest rate can imply lower rate of return because higher interest attracts lower quality borrowers. Micro-finance theories argue that social networks may identify good risks either because friends and colleagues observe the intrinsic type of borrowers ex ante or because the monitoring within social networks provides a stronger incentive to pay off loans ex post. We find evidence both for and against this argument. For example, loans with friend endorsements and friend bids have fewer missed payments and yield significantly higher rates of return than other loans. On the other hand, the estimated returns of group loans are significantly lower than those of non-group loans. That being said, the return gap between group and non-group loans is closing over time. This convergence is partially due to lender learning and partially due to Prosper eliminating group leader rewards which motivated leaders to fund lower quality loans in order to earn the rewards.
    Keywords: peer-to-peer lending, e-commerce, adverse selection, information asymmetry, social networks.
    JEL: D45 D53 D8 D81
    Date: 2008–11–14
  4. By: Lehner, Maria
    Abstract: Microfinance is typically associated with joint liability of group members. However, a large part of microfinance institutions rather offers individual instead of group loans. We analyze the incentive mechanisms in both individual and group contracts. Moreover, we show that microfinance institutions offer group loans when the loan size is rather large, refinancing costs are high, and competition between microfinance institutions is low. Otherwise, individual loans are offered. Interestingly, our analysis predicts that individual lending in microfinance will gain in importance in the future if microfinance institutions continue to get better access to capital markets and if competition further rises.
    JEL: F37 G21 G34 L13 O16
    Date: 2008–11–17

This issue is ©2008 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 For comments please write to the director of NEP, Marco Novarese at <>. 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.