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Does counter‐guarantee affect microcredit mechanism's performance on repayment? Evidence from Guangzhou, China

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  • Meishan Jiang
  • Krishna P. Paudel
  • Seydina O. Sene

Abstract

We study the credit repayment effectiveness when microcredit is operating in combination with the counter‐guarantee mechanism. We use a sample of 176 poor urban borrowers from the Guangzhou Municipal Labor and Social Security Bureau (GZMLSSB). Their loans were guaranteed by the Guangzhou Financing Guarantee Center (GZFGC), then counter‐guaranteed by borrowers. The size of loans offered to urban borrowers varies from 20,000 RMB to 30,000 RMB per individual per year (60,000 RMB if part of a partnership and maximum of 50,000 RMB per individual in a given loan cycle). We estimated the model using a conditional mixed process given the binary dependent variable and a binary endogenous explanatory variable in the model. We find that the real estate mortgage as a financial counter‐guarantee mechanism has no effects, but a training certificate as a non‐financial counter‐guarantee mechanism has a negative impact on the microcredit repayment rate. Group lending and focusing on women have no impact as well. The findings help to minimize the management cost of pre‐default and default risk on microcredit loans in GZMLSSB and other similar projects by targeting university graduates. Our study is the first to assess the impact of microcredit mechanisms together with counter‐guarantee on loan repayments in China.

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  • Meishan Jiang & Krishna P. Paudel & Seydina O. Sene, 2022. "Does counter‐guarantee affect microcredit mechanism's performance on repayment? Evidence from Guangzhou, China," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 1807-1817, April.
    • Handle: RePEc:wly:ijfiec:v:27:y:2022:i:2:p:1807-1817
    DOI: 10.1002/ijfe.2243
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