IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2006.06035.html
   My bibliography  Save this paper

Optimal Group Size in Microlending

Author

Listed:
  • Philip Protter
  • Alejandra Quintos

Abstract

Microlending, where a bank lends to a small group of people without credit histories, began with the Grameen Bank in Bangladesh, and is widely seen as the creation of Muhammad Yunus, who received the Nobel Peace Prize in recognition of his largely successful efforts. Since that time the modeling of microlending has received a fair amount of academic attention. One of the issues not yet addressed in full detail, however, is the issue of the size of the group. Some attention has nevertheless been paid using an experimental and game theory approach. We, instead, take a mathematical approach to the issue of an optimal group size, where the goal is to minimize the probability of default of the group. To do this, one has to create a model with interacting forces, and to make precise the hypotheses of the model. We show that the original choice of Muhammad Yunus, of a group size of five people, is, under the right, and, we believe, reasonable hypotheses, either close to optimal, or even at times exactly optimal, i.e., the optimal group size is indeed five people.

Suggested Citation

  • Philip Protter & Alejandra Quintos, 2020. "Optimal Group Size in Microlending," Papers 2006.06035, arXiv.org, revised Dec 2020.
  • Handle: RePEc:arx:papers:2006.06035
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2006.06035
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Chowdhury, Prabal Roy, 2005. "Group-lending: Sequential financing, lender monitoring and joint liability," Journal of Development Economics, Elsevier, vol. 77(2), pages 415-439, August.
    2. Christian Ahlin, 2017. "Matching Patterns When Group Size Exceeds Two," American Economic Journal: Microeconomics, American Economic Association, vol. 9(1), pages 352-384, February.
    3. Chowdhury, Prabal Roy, 2007. "Group-lending with sequential financing, contingent renewal and social capital," Journal of Development Economics, Elsevier, vol. 84(1), pages 487-506, September.
    4. Ahlin, Christian, 2015. "The role of group size in group lending," Journal of Development Economics, Elsevier, vol. 115(C), pages 140-155.
    5. Conlin, Michael, 1999. "Peer group micro-lending programs in Canada and the United States," Journal of Development Economics, Elsevier, vol. 60(1), pages 249-269, October.
    6. Alexander Tedeschi, Gwendolyn, 2006. "Here today, gone tomorrow: Can dynamic incentives make microfinance more flexible?," Journal of Development Economics, Elsevier, vol. 80(1), pages 84-105, June.
    7. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
    8. Bahar Rezaei & Sriram Dasu & Reza Ahmadi, 2017. "Optimal Group Size in Joint Liability Contracts," Decision Analysis, INFORMS, vol. 14(3), pages 204-225, September.
    9. Robert Jarrow & Philip Protter, 2019. "Fair Microfinance Loan Rates," International Review of Finance, International Review of Finance Ltd., vol. 19(4), pages 909-918, December.
    10. Stiglitz, Joseph E, 1990. "Peer Monitoring and Credit Markets," The World Bank Economic Review, World Bank, vol. 4(3), pages 351-366, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Philip Protter & Alejandra Quintos, 2022. "Optimal group size in microlending," Annals of Finance, Springer, vol. 18(1), pages 121-132, March.
    2. Emilios Galariotis & Christophe Villa & Nurmukhammad Yusupov, 2011. "Recent Advances in Lending to the Poor with Asymmetric Information," Journal of Development Studies, Taylor & Francis Journals, vol. 47(9), pages 1371-1390, July.
    3. Cao, Bin & Zhong, Yuanguang & Zhou, Yong-Wu, 2024. "The role of completely joint liability in financing multiple capital-constrained firms: Risk sharing, inventory and financial strategies," European Journal of Operational Research, Elsevier, vol. 313(3), pages 1072-1087.
    4. Chowdhury, Shyamal & Chowdhury, Prabal Roy & Sengupta, Kunal, 2014. "Sequential lending with dynamic joint liability in micro-finance," Journal of Development Economics, Elsevier, vol. 111(C), pages 167-180.
    5. Hisaki KONO & Kazushi TAKAHASHI, 2010. "Microfinance Revolution: Its Effects, Innovations, And Challenges," The Developing Economies, Institute of Developing Economies, vol. 48(1), pages 15-73, March.
    6. Cason, Timothy N. & Gangadharan, Lata & Maitra, Pushkar, 2012. "Moral hazard and peer monitoring in a laboratory microfinance experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 192-209.
    7. Carli, Francesco & Uras, Burak R., 2017. "Joint-liability with endogenously asymmetric group loan contracts," Journal of Development Economics, Elsevier, vol. 127(C), pages 72-90.
    8. Allen, Treb, 2016. "Optimal (partial) group liability in microfinance lending," Journal of Development Economics, Elsevier, vol. 121(C), pages 201-216.
    9. Abhirupa Das & Uday Bhanu Sinha, 2022. "Microfinance institution and moneylenders in a segmented rural credit market," Working papers 324, Centre for Development Economics, Delhi School of Economics.
    10. Bahar Rezaei & Sriram Dasu & Reza Ahmadi, 2017. "Optimal Group Size in Joint Liability Contracts," Decision Analysis, INFORMS, vol. 14(3), pages 204-225, September.
    11. Brishti Guha & Prabal Roy Chowdhury, 2014. "Borrower Targeting under Microfinance Competition with Motivated Microfinance Institutions and Strategic Complementarity," The Developing Economies, Institute of Developing Economies, vol. 52(3), pages 211-240, September.
    12. Kurosaki, Takashi & Khan, Hidayat Ullah, 2011. "Vulnerability of Microfinance to Strategic Default and Covariate Shocks:Evidence from Pakistan," PRIMCED Discussion Paper Series 10, Institute of Economic Research, Hitotsubashi University.
    13. Kumar Aniket, 2007. "Does Subsidising the Cost of Capital Help the Poorest? An Analysis of Saving Opportunities in Group Lending," Edinburgh School of Economics Discussion Paper Series 140, Edinburgh School of Economics, University of Edinburgh.
    14. Xavier Giné & Dean Karlan, 2009. "Group versus Individual Liability: Long Term Evidence from Philippine Microcredit Lending Groups," Working Papers 970, Economic Growth Center, Yale University.
    15. Altınok, Ahmet & Sever, Can, 2014. "Efficient Microlending without Joint Liability," MPRA Paper 56598, University Library of Munich, Germany.
    16. Bruno, Olivier & Khachatryan, Knar, 2020. "Compulsory versus voluntary savings as an incentive mechanism in microfinance programs," Journal of Behavioral and Experimental Finance, Elsevier, vol. 26(C).
    17. Fujimoto, Junichi & Lee, Junsang, 2020. "Optimal self-financing microfinance contracts when borrowers have risk aversion and limited commitment," Journal of Mathematical Economics, Elsevier, vol. 91(C), pages 60-79.
    18. Shyamal Chowdhury & Prabal Roy Chowdhury & Kunal Sengupta, 2014. "Sequential lending with dynamic joint liability in micro-finance," Discussion Papers 14-07, Indian Statistical Institute, Delhi.
    19. Ozgur Emre Ergungor, 2010. "Bank Branch Presence and Access to Credit in Low- to Moderate-Income Neighborhoods," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1321-1349, October.
    20. Ahlin, Christian, 2015. "The role of group size in group lending," Journal of Development Economics, Elsevier, vol. 115(C), pages 140-155.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2006.06035. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.