Sequential lending with dynamic joint liability in micro-finance

Chowdhury, Shyamal; Chowdhury, Prabal Roy; Sengupta, Kunal

doi:10.1016/j.jdeveco.2014.09.002

Cited by 7 publications

(4 citation statements)

References 36 publications

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“…Furthermore, beneficiary banks in some cases adopt a group-based lending approach like the one adopted widely in micro-credit programs to reduce the default risk (Jointliability mechanism works successfully as a safeguard against credit default in many microcredit programs, particularly in Bangladesh [27,28]. Therefore, these two criteria of selecting borrowers-an SMEF beneficiary and being a part of group-based lending-reduce the asymmetry of information about the borrowers and increases the probability of loan repayment significantly.…”

Section: The Cw Programmentioning

confidence: 99%

Sustainable Financing Strategies for the SMEs: Two Alternative Models

2023

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A sustainable financing strategy for SMEs should aim to enhance a low-cost collateral-free supply of loans to SMEs with good track records of repayments to banks. In this paper, we suggest two alternative financing models for SMEs that address certain borrowing constraints of SMEs. First, the model incorporates institutional mechanisms involving the government, banks, and SMEs. The strategy employs a two-pronged approach: (i) the government enhances the supply of loanable funds to banks, and (ii) identifies good SME borrowers through skills development programs and introduces them to banks. This model will reduce default risk and allow banks to offer lower-interest and collateral-free credit to SMEs, thereby improving their access to finance and performance. Second, the model could be extended to accommodate digital finance using a data-driven credit risk score of the borrowers to reduce banks’ default risks and transaction costs with or without government funds. The proposed model could resolve the moral hazard and selection bias problems. Our proposed models are based on a public-private partnership approach and therefore could solve certain borrowing constraints of SMEs. Our empirical results support the model outcomes and therefore are consistent with the predictions of our theoretical models.

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Section: The Cw Programmentioning

confidence: 99%

Sustainable Financing Strategies for the SMEs: Two Alternative Models

2023

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“…Although there has been a movement towards individual lending over the past decade or so, group lending has been widely adopted by MFIs worldwide (Abbink et al, 2006; Chowdhury et al, 2014). The popularity of group lending can be explained by its reach to more people, thus widening the benefits to the wider community.…”

Section: Introductionmentioning

confidence: 99%

“…Ahlin and Townsend (2007) study in Thailand revealed that the close bond and regular interaction between the group loan members can conceal important project information from the lender, impede social sanctions and promote collusion. All group members can work together to default on repayments and shield one another from the social pressure coming from the wider community (Chowdhury et al, 2014). While Mustakallio et al (2002) refers to close ties as family links, the definition and measurement of tie strength have not been specified in the work of (Ahlin & Townsend, 2007; Dufhues et al, 2012).…”

Section: Introductionmentioning

confidence: 99%

Kinship, gender and social links impact on micro group lending defaults

et al. 2023

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Joint liability aspires to improve micro-loan performance through the support of, and pressure from, the group borrowers. This paper examines how the group composition, in terms of the mixture of kinship (Family) ties and social (Friends and Neighbours) ties among the borrowers, affects the default rates. Using binary logistics regression and three machine learning models, responses from 507 group micro-loan borrowers from four major Moroccan cities were analysed. The results show that the stronger the family and kinship ties are within a loan group, the higher is the default rate. On the contrary, the stronger the social ties are among the group, the lower is the default rate.Other key findings include that the diversion of fund usage from investment to consumption is not found to significantly cause default. Also, loan default can be a consequence of borrowers' strategic choice rather than financial distress.As compared to the female members, male borrowers are found to be causing higher default rates. Interestingly, the gender-related default rates are lower when more of the male borrowers are only socially related. Finally, group size is found to be positively associated with default. Our findings can help microfinance institutions refine their lending policies and guidance on groups' composition and size to reduce default rates.

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“…Joint-liability mechanism works successfully as a safeguard against credit default in many microcredit programs, particularly in Bangladesh(Chowdhury, Chowdhury, and Sengupta 2014;Pitt and Khandker 2002).…”

mentioning

confidence: 99%

Sustainable Financing Strategies for SMEs: Two Alternative Models

Hossain¹,

Yoshino²,

Tsubota³

2023

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A sustainable financing strategy for SMEs should aim to enhance a low-cost collateral-free supply of loans to SMEs with good track records of repayments to banks. This paper suggests two alternative financing mechanisms to overcome certain borrowing constraints of SMEs. First, it suggests an institutional mechanism involving the government, banks, and SMEs. Under the mechanism, a government's subsidized loan fund with the provision of training and capacity-building support to borrower SMEs could reduce, on the one hand, the fund constraint of banks and, on the other hand, the asymmetry of information about borrowers, and so does the default risks. This model will allow banks to offer collateral-free lower-interest credit to SMEs, thereby improving their access to finance and their performance as well. Second, as the first model might involve borrower selection bias and moral hazard problems, an alternative model has been proposed with a digital financing mechanism with/without subsidized funds that could produce similar or better results. Using survey data from 526 SMEs in Bangladesh, the empirical results are found to be consistent with the prediction of our theoretical model.

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Sequential lending with dynamic joint liability in micro-finance

Cited by 7 publications

References 36 publications

Sustainable Financing Strategies for the SMEs: Two Alternative Models

Sustainable Financing Strategies for the SMEs: Two Alternative Models

Kinship, gender and social links impact on micro group lending defaults

Sustainable Financing Strategies for SMEs: Two Alternative Models

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