Joint liability in a classic microfinance contract: review of theory and empirics

Abstract

Purpose The purpose of this paper is to investigate the role of joint liability in improving the repayment performance of a microfinance program. Design/methodology/approach This is a systematic review of the theoretical and empirical literature. Findings The theoretical literature has shown, using models of peer selection, peer monitoring and peer pressure, that joint liability overcomes both the informational and enforcement failures present in credit markets for the poor. However, the empirical literature does not yield a clear answer on how much of the success of microfinance programs can be attributed to the effect of joint liability alone without considering the effect of other instruments used by microfinance programs. Further, it is seen that joint liability does not work in isolation, but its effect is dependent on social, cultural and economic environment. Research limitations/implications An important future research agenda could be to study the roles of different overlapping mechanisms in group lending and to look at their interactions. Practical implications The concept of joint liability works well both in the rural and urban areas, but different social, cultural and economic factors should be analyzed before initiating a microfinance program. In developed regions, focus should be on strengthening peer selection and peer monitoring, as information problems are prevalent. In underdeveloped regions, the major problem is of strategic default, so the focus should be on strengthening social sanctions. Social implications Findings can be used for optimal design of credit contracts for the poor. Originality/value The paper reviews the existing literature on – “whether and how” – joint liability lending works in inefficient credit markets and comes up with practical implications for the microfinance sector.

Joint Resposibility System As The Key Success Of Women's Cooperative Setia Bhakti Indonesian East Java Woman

“…With an NPL of 0%, the assets of the cooperative have grown from 1977 to 2019. This is in accordance with the findings of previous researchers that implementing a joint responsibility system can greatly contribute to the achievement of zero bad debt (Arifin, 2008) so that it is harmless because all risks are tolerated by the group (Faidah & Dewi, 2014), and improve repayment performance (Rathore, 2017) so cooperative assets develop. The SBW women's cooperative is considered successful in implementing a joint responsibility system assessed based on:…”

“…This SBW women's cooperative is a non-governmental cooperative that has a high enough risk because members borrow funds from the cooperative without providing collateral as collateral, but the group will guarantee or be responsible for all obligations of the members. From the results of previous research, the benefits of with joint resposibility include safe cooperative assets, since all threats are tolerated by the group (Faidah & Dewi, 2014), greatly contributed to the achievement of nil bad obligation (Arifin, 2008), can raise a sense of mutual solvency and duty, making control mechanisms (Wahyudi & Rustantia, 2017), shows solid social bonds (Carli & Uras, 2017), improve repayment performance (Rathore, 2017).…”

The Role of Micro Waqf Bank in Women’s Micro-Business Empowerment through Islamic Social Finance: Mixed-Method Evidence from Mawaridussalam Indonesia

“…If one or more group members fail to pay the financing capital, all group members are responsible for paying off the capital financing. Having a shared responsibility system in group-based financing is very helpful in building relationships and trust among members (Kong et al 2015;Mukherjee and Bhattacharya 2015;Rathore 2017).…”

The Impact of Joint Liability Group Lending on Lowering the Risk of Farmer and Agriculture Crowdfunding in Indonesia

“…Farmers have limited collateral and no official credit histories and are often dispersed across a rural geography (Khavul 2010; Pasupuleti 2010). Some problems that traditional financial institutions face when lending to low-income individuals are information asymmetry, moral hazard, auditing cost and enforcement (Khavul 2010; Rathore 2017). Information asymmetry is a condition where lenders do not get perfect information about the characteristics of borrowers so that lenders find it difficult to distinguish between borrowers who have a low default risk (safe borrowers) and borrowers who have a high default risk (risky borrowers).…”

“…Information asymmetry is a condition where lenders do not get perfect information about the characteristics of borrowers so that lenders find it difficult to distinguish between borrowers who have a low default risk (safe borrowers) and borrowers who have a high default risk (risky borrowers). This information asymmetry problem is also known as adverse selection wherein even though the characteristics of the borrower cannot be directly observed by the lender, this affects the risk of loan repayment (Rathore 2017). The moral hazard problem is ensuring that the borrower will use the loan properly so that he will be able to repay the loan (Ghatak and Guinnane 1999).…”