Group lending and individual lending with strategic default

Bhole, Bharat; Ogden, Sean P.

doi:10.1016/j.jdeveco.2009.06.004

Cited by 74 publications

(55 citation statements)

References 12 publications

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“…Allen, 2014) and plenty of theoretical work on more flexible contracts, e.g. Rai and Sjöström (2004), Tedeschi (2006), Bhole andOgden (2010), de Quidt et al (2013), we assume strict dynamic incentives and simple contracts to focus attention on the key social capital mechanism, and because we believe these are a good approximation to typical MFI practices. Relaxing the strength of dynamic incentives (for example by terminating with some probability smaller than one in the case of default) increases borrower welfare, but it cannot eliminate the central ine ciency in joint liability lending, namely that the lender must sometimes punish a borrower who could not repay her partner's loan but would have repaid her own.…”

Section: Modelmentioning

confidence: 99%

“…As a simple extension, we consider how our EJ and IJ borrowers are a↵ected by introducing positively or negatively correlated returns into the model. 27 Problems that have also received attention in Besley and Coate (1995), Rai and Sjöström (2004), Bhole and Ogden (2010), Rai and Sjöström (2010) and Allen (2014).…”

Section: Correlated Returnsmentioning

confidence: 99%

“…5 Secondly, when a borrower is unsuccessful, sometimes EJ induces the successful partner to bail them out, but sometimes it has a perverse e↵ect, inducing them to default completely, while under IL they would have repaid. Rai and Sjöström (2004) and Bhole and Ogden (2010) approach these issues from a mechanism design perspective -designing crossreporting mechanisms or stochastic dynamic incentives that minimize the sanctions used by the lender. Baland et al (2013) provide an alternative explanation of the apparent trend away from what we call EJ towards IL, based on loan size.…”

Section: Introductionmentioning

confidence: 99%

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Group lending without joint liability

Quidt

Fetzer

Ghatak

2016

Journal of Development Economics

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This paper contrasts individual liability lending with and without groups to joint liability lending. We are motivated by an apparent shift away from the use of joint liability by microfinance institutions, combined with recent evidence that a) converting joint liability groups to individual liability groups did not a↵ect repayment rates, and b) an intervention that increased social capital in individual liability borrowing groups led to improved repayment performance. First, we show that individual lending with or without groups may constitute a welfare improvement over joint liability, so long as borrowers have su cient social capital to sustain mutual insurance. Second, we explore how the lender's lower transaction costs in group lending can encourage insurance by reducing the amount borrowers have to pay to bail one another out. Third, we discuss how group meetings might encourage insurance, either by increasing the incentive to invest in social capital, or because the time spent in meetings can facilitate setting up insurance arrangements. Finally, we perform a simple simulation exercise, evaluating quantitatively the welfare impacts of alternative forms of lending and how they relate to social capital.

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Section: Modelmentioning

confidence: 99%

Section: Correlated Returnsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Group lending without joint liability

Quidt

Fetzer

Ghatak

2016

Journal of Development Economics

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“…10 The z-tree software (Fischbacher (2007)) was used to conduct the experiment. Each session lasted approximately 2 hours, including instruction time.…”

Section: Experimental Designmentioning

confidence: 99%

Moral hazard and peer monitoring in a laboratory microfinance experiment

Cason

Gangadharan

Maitra

2012

Journal of Economic Behavior & Organization

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This paper reports the results from a laboratory microfinance experiment of group lending in the presence of moral hazard and (costly) peer monitoring. We compare peer monitoring treatments in which credit is provided to members of the group to individual lending treatments with lender monitoring. We find that if the cost of peer monitoring is lower than the cost of lender monitoring, peer monitoring results in higher loan frequencies, higher monitoring and higher repayment rates compared to lender monitoring. In the absence of monitoring cost differences, however, lending, monitoring and repayment behaviour is mostly similar across group and individual lending schemes. Within group lending, contrary to theoretical predictions, simultaneous and sequential lending rules provide equivalent empirical performance.JEL Classification: G21, C92, O2.

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“…Lehner (2009) therefore concludes that individual lending may be preferred when the requested amount is small, refinancing costs are low and competition is intense. Presenting a basic model and comparing between the optimal individual lending contract and the optimal simple group lending, Bhole and Ogden (2010) disagree with Lehner (2009). They argue that group lending performs better than individual lending, even in the absence of social sanctions.…”

Section: Lending Techniquesmentioning

confidence: 94%

Unfulfilled loan demand among Agro SMEs in Namibia

Amadhila

Ikhide

2016

S. Afr. j. econ. manag. sci.

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Using a qualitative methodology approach, a case study research design by way of in-depth semi-structured interview(s) was followed to interview farmers, commercial banks, development banks, venture capitals and private equities to determine the financing options available for farmers and provide reasons why some financial institutions shy away from providing finance to agricultural enterprises. This study deviates from prior studies which have focused on small-scale farmers and subjected farmers' access to finance to rural credit markets, mostly informal money lenders using secondary information mostly from household surveys to build econometric models. The study indicates that only about 33 percent of formal financial institutions are providing finance to agricultural SMEs. The lack of expertise and perception of risk were cited as top reasons why formal financial institutions find it hard to provide finance to agricultural SMEs. Building on opinions from other authors cited in this paper, we maintain that new financing mechanisms can be achieved by all types of financial institutions through learning from experiences by other successful countries.

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Group lending and individual lending with strategic default

Cited by 74 publications

References 12 publications

Group lending without joint liability

Group lending without joint liability

Moral hazard and peer monitoring in a laboratory microfinance experiment

Unfulfilled loan demand among Agro SMEs in Namibia

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