| By: |
Jean-Marie Baland (University of Namur);
Rohini Somanathan (Department of Economics, Delhi School of Economics & Institute for Advanced Study, Princeton);
Zaki Wahhaj (University of Oxford) |
| Abstract: |
Group loans with joint liability have been a distinguishing feature of many
micronance programs. While such lending has benetted millions of borrowers,
major lending insti- tutions have acknowledged their limited impact among the
very poor and have recently favored individual contracts. This paper attempts
to understand these empirical patterns using a model in which there is a
single investment project and access to credit is limited by weak repayment
incentives. We show that in the absence of large social sanctions, the poorest
borrowers are oered individual and not group contracts. When both types of
contracts are feasible, the relative gains from group loans are shown to be
decreasing in loan size. We compare the role of bank enforcement with social
sanctions and nd that bank enforcement is more eective in increasing outreach
while social sanctions raise the welfare of infra-marginal borrowers. Finally,
we explore the welfare eects of group size and nd that those requiring small
loans are better served by larger groups but group size eects are, in general,
ambiguous. |
| Keywords: |
microcredit, joint-liability, group lending, repayment incentives, social sanctions. |
| JEL: |
I38 G21 O12 O16 |
| Date: |
2010–11 |
| URL: |
http://d.repec.org/n?u=RePEc:cde:cdewps:192&r=mfd |