Group-Lending: Sequential Financing, Lender Monitoring and Joint Liability

Posted: 17 Nov 2009

Date Written: 2005

Abstract

Group lending has gained in popularity over recent years, with the Grameen Bank in Bangladesh proving successful over recent years. Several possible results of this new found popularity include over-emphasis on the positive aspects of such schemes, sequential lending, active monitoring by the lenders, and joint liability. This investigation seeks to develop a framework to explain all aspects of group lending by creating a model of group lending, based on peer monitoring and moral hazard.In section two, the model is explained in greater detail, as are the stages of individual and group lending.Section three then focuses upon group lending with sequential financing, considering the stages when joint liability is and is not present. Section three then examines group lending with bank monitoring, again focusing on the presence or absence of joint liability.Following the discussion of group lending in the preceding sections, section five looks at the robustness of the analyses. Various factors, including renegotiation, side-contracting, and social sanctions are examined regarding their respective influences upon the analyses.The initial findings of this study indicate under-monitoring to be a potential weakness of group lending.Based upon the findings, several tentative policy conclusions are presented. (AKP)

Keywords: Lending practices, Social sanctions, Sequential lending, Grameen Bank, Banking industry, Group loans, Joint liabilities, Liabilities, Microfinance, Moral hazard problem, Peer oversight

Suggested Citation

Chowdhury, Prabal Roy, Group-Lending: Sequential Financing, Lender Monitoring and Joint Liability (2005). University of Illinois at Urbana-Champaign's Academy for Entrepreneurial Leadership Historical Research Reference in Entrepreneurship, Available at SSRN: https://ssrn.com/abstract=1507617

Prabal Roy Chowdhury (Contact Author)

Jawaharlal Nehru University ( email )

CSDILE, School of International Studies
New Delhi
India

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