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Dynamic Incentives in Microfinance Group Lending

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  • Naveen Kumar K

Abstract

One of the most essential tools of poverty reduction would be the viable expansion of institutional credit facilities to large sections of the people who neither have adequate collateral nor credit history to secure a loan. In this backdrop, social collateral is popularized through the group lending programs to address the credit market problems. Microfinance through group lending is acting as a screening device; the joint liability mechanism creates incentives for internal monitoring. Hence, it has received a lot of attention from policy makers as well as academicians. It is playing an important role in delivering financial services to the “socially and economically excluded†poor, in general, and women, in particular. The group lending works with various dynamic incentives. One such kind is principle of progressive lending and it plays a vital role in sustaining the groups for the persistent delivery of microfinance services to its members. In progressive lending, a typical borrower receives very small amounts at first, which increases with good repayment conduct or it links new, larger loans to past repayment. This article explores possible theoretical and empirical relationship between progressive lending and its determinants in group lending approach. The primary survey was conducted in 10 villages covering 106 self-help groups and 318 members in Karnataka, India. The empirical results show the progressive lending amount rising up to 698% of the initial loan of the self-help groups.

Suggested Citation

  • Naveen Kumar K, 2012. "Dynamic Incentives in Microfinance Group Lending," SAGE Open, , vol. 2(2), pages 21582440124, April.
  • Handle: RePEc:sae:sagope:v:2:y:2012:i:2:p:2158244012444280
    DOI: 10.1177/2158244012444280
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    References listed on IDEAS

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    1. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, vol. 46(1), pages 1-18, February.
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    Cited by:

    1. Ismail, Abdul Ghafar & Yussof, Wan Nor AisyahWan, 2015. "Group Lending Policy and Repayment Rate in Islamic Microfinance Institutions," Policy Papers 1435-1, The Islamic Research and Teaching Institute (IRTI).
    2. Kamaluddin, Amrizah & Hadi, Nabawiyah Abdul & Alam, Md. Mahmudul & Adil, Mohamed Azam Mohamed, 2019. "Social Collateral Model for Islamic Microfinance," SocArXiv ya8ft, Center for Open Science.
    3. Disha Bhanot & Varadraj Bapat, 2019. "Contributory factors towards sustainability of bank-linked self-help groups in India," Asia-Pacific Sustainable Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 26(2), pages 25-55, December.
    4. Gehrig, Stefan & Mesoudi, Alex & Lamba, Shakti, 2020. "Banking on cooperation: An evolutionary analysis of microfinance loan repayment behaviour," OSF Preprints tmpqj, Center for Open Science.
    5. Shapiro, D.A., 2015. "Microfinance and dynamic incentives," Journal of Development Economics, Elsevier, vol. 115(C), pages 73-84.

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