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Group versus Individual Lending in Microfinance

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  • Lehner, Maria

Abstract

Microfinance is typically associated with joint liability of group members. However, a large part of microfinance institutions rather offers individual instead of group loans. We analyze the incentive mechanisms in both individual and group contracts. Moreover, we show that microfinance institutions offer group loans when the loan size is rather large, refinancing costs are high, and competition between microfinance institutions is low. Otherwise, individual loans are offered. Interestingly, our analysis predicts that individual lending in microfinance will gain in importance in the future if microfinance institutions continue to get better access to capital markets and if competition further rises.

Suggested Citation

  • Lehner, Maria, 2008. "Group versus Individual Lending in Microfinance," Discussion Papers in Economics 7486, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenec:7486
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    References listed on IDEAS

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    1. de Aghion, Beatriz Armendariz & Gollier, Christian, 2000. "Peer Group Formation in an Adverse Selection Model," Economic Journal, Royal Economic Society, vol. 110(465), pages 632-643, July.
    2. Ahlin, Christian & Townsend, Robert M., 2007. "Selection into and across credit contracts: Theory and field research," Journal of Econometrics, Elsevier, vol. 136(2), pages 665-698, February.
    3. Xavier Giné & Pamela Jakiela & Dean Karlan & Jonathan Morduch, 2010. "Microfinance Games," American Economic Journal: Applied Economics, American Economic Association, vol. 2(3), pages 60-95, July.
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    Cited by:

    1. Moh'd Al-Azzam & Maria Heracleous & Sudipta Sarangi, 2013. "Does the Group Leader Affect Repayment Performance Differently?," Southern Economic Journal, John Wiley & Sons, vol. 80(2), pages 502-522, October.
    2. Kundu, Amit, 2009. "Choice Between Microfinance System Operating on the Basis of Individual Liability Loan Contract or Through Joint Liability Loan Contract," MPRA Paper 14981, University Library of Munich, Germany.
    3. Al-Azzam, Moh'd & Carter Hill, R. & Sarangi, Sudipta, 2012. "Repayment performance in group lending: Evidence from Jordan," Journal of Development Economics, Elsevier, vol. 97(2), pages 404-414.

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    More about this item

    JEL classification:

    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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