Defining Social Collateral in Microfinance Group Lending

Postelnicu, Luminita; Hermes, Niels; Szafarz, Ariane

doi:10.1057/9781137399663.0014

Cited by 10 publications

(17 citation statements)

References 26 publications

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“…In our case, we found evidence of the advantages of group lending with joint liability to loan recovery, as has been reported in literature (Armendáriz & Morduch, 2010;Postelnicu, Hermes, & Szafarz, 2014 Bank, 2007). Many BRAC borrowers were engaged in subsistence food crop production with some relying exclusively on agriculture.…”

Section: Conclusion and Discussionsupporting

confidence: 90%

Microcredit to women and its contribution to production and household food security

Namayengo

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The alignment of microfinance programs with the context and expectations of recipients is critical to ensuring clients' satisfaction and desired program outcomes. This study sought to investigate the extent to which the objectives and design of the BRAC microfinance program match the expectations, context and characteristics of female borrowers in a rural agrarian setting in Uganda. Quantitative and qualitative survey methods were used to obtain socio-demographic, personality and microenterprise (ME) characteristics of existing and incoming borrowers and to obtain information about the microcredit program. We found that BRAC uses a modified Grameen-like group lending model to provide small, high interest rate production loans and follows a rigorous loan processing and recovery procedure. BRAC clients are mainly impoverished subsistence farmers who derive income from diverse farming and non-farm activities. The major reason to borrow is to meet lump-sum monetary needs usually school fees and for investment in informal small non-farm business activities. Many borrowers use diverse sources of funds to meet repayment obligations. Defaulting on loans is quite low. The stress caused by weekly loan repayment and resolution of lump sum cash needs were identified as reasons for women to stop borrowing. The limited loan amounts, the diversions of loans to nonproduction activities, the stages of the businesses and the weekly recovery program without grace period may limit the contribution of these loans to ME expansion and increase in income.

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Section: Conclusion and Discussionsupporting

confidence: 90%

Microcredit to women and its contribution to production and household food security

Namayengo

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“…Microfinance organization have different procedures of lending loan to the poor people (Nordin et al, 2019), ranging from village bank, individual lending and group lending but the common approaches of lending money to the poor people are group and individual lending (Xu et al, 2019) and in most of the developing nations the microfinance organization prefer the group lending approach as it creates a substitute for asset collateral (Mosley,1986;Udry, 1990). In addition, group lending approach mitigates moral hazard, adverse selection and debt enforcement problems (Besley & Coate, 1995;Morduch, 1999;Ghatak, 1999;Ahlin & Waters, 2011;Postelnicu et al, 2014;Yiwen & Guangwen, 2016;Simmons & Tantisantiwong, 2018). Moreover, in comparison to the individual lending approach, the loans are granted at lower interest rates in group lending design (Stiglitz, 1990;Besley & Coate, 1995;Ghatak & Guinnane, 1999;Armendariz de Aghion, 1999;Ghatak, 2000;Karlan, 2005).…”

Section: Literature Reviewmentioning

confidence: 99%

The Mediating Role of Group Lending Between Poverty and Microfinance

Shah¹,

Rahman

Khan

2019

NRJSS

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Microfinance has become the main tool of poverty alleviation in the 21st century. The microfinance program in different countries has different lending approaches. The most common in the world is group lending and individual lending. Each lending procedure has its own merits and demerits. The present research is about the evaluation of the mediating role of group lending between microfinance and poverty. In this regard, the study was carried out in district Chitral. The data was collected from two local support organizations using a structured questionnaire. For the purpose of analysis structural equation modeling was used and Smart PLS was used as an analysis tool. The finding of the results shows that the group leaders have a positive role in mediating the relationship between microfinance and poverty and in reducing the moral hazards and proper utilization of funds.

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“…Social collateral refers to internal and external social ties that aff ect the behavior of MF clients. Such ties interest MFIs as they help in predicting the repayment performance of loans in the grouplending model ( Postelnicu et al ., 2013 ).…”

Section: Recommendation 2: Practitioners Should Consider Peers For Fomentioning

confidence: 99%

“…It is worth clarifying here that, in the MF literature, social interactions that affect the financial behavior of MF clients are referred to using the terms ‘social capital’ and ‘social collateral.’ According to Postelnicu et al . (), social capital refers to the social ties between the microfinance borrowers inside their groups. Social collateral refers to internal and external social ties that affect the behavior of MF clients.…”

Section: Field Studies With Mf and Non‐mf Clientsmentioning

confidence: 99%

Behavioral Microfinance: Evidence from a Field Experiment in Cairo

2015

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Understanding the behavior of the poor has long been an important focus of microfi nance (MF) research. On the one hand, several studies have been conducted to understand the fi nancial decisions of MF clients related to the construction of trustworthiness and social collateral (which replaces fi nancial collateral in MF loans). On the other hand, the natural counterpart of trustworthiness (i.e., risk taking) has been another main point of focus when evaluating MF clients ' behavior. Yet, most of these studies remain observational, use standard surveys about behavior, or make use of fi nancial information only -as found in many qualitative impact assessments and econometric studies. Th erefore, the usual biases when reporting stated behavior, in particular about items that are diffi cult to rationalize (such as trustworthiness and risk taking), are diffi cult to capture. Only recently have experimental games become popular in MF to gain deeper insights into MF clients and reduce these biases.Overall, the fi nancial decisions of MF clients seem complex to MF practitioners, who increasingly question the needs and wants of poor MF clients, especially after the recent crises in the MF industry. Two of the most documented diffi culties that MF institutions (MFIs) usually face are the adverse selection problem and the absence of fi nancial collateral provided by the borrower ( Giné et al ., 2010 ). In other words, MFIs serve clients without credit history, and are therefore unable to predict their willingness or ability to repay the loan. Moreover, these clients live in social neighborhoods where no one around has fi nancial reserves to cover a Microfi nance clients reveal safer fi nancial behaviors compared with non-microfi nance clients.The self-esteem of microfi nance clients is higher compared with non-microfi nance clients.MFIs should investigate in detail the structure of the social neighborhood prior to client selection.

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Defining Social Collateral in Microfinance Group Lending

Cited by 10 publications

References 26 publications

Microcredit to women and its contribution to production and household food security

Microcredit to women and its contribution to production and household food security

The Mediating Role of Group Lending Between Poverty and Microfinance

Behavioral Microfinance: Evidence from a Field Experiment in Cairo

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