Repayment Incentives and the Distribution of Gains from Group Lending

26 Pages Posted: 31 Jan 2011

See all articles by Jean-Marie Baland

Jean-Marie Baland

Facultés Universitaires Notre-Dame de la Paix (FUNDP)

Rohini Somanathan

University of Delhi - Department of Economics

Zaki Wahhaj

University of Kent - Department of Economics; University of Namur; University of Kent - School of Economics

Date Written: January 2011

Abstract

Group loans with joint liability have been a distinguishing feature of many microfinance programs. While such lending has benefitted millions of borrowers, major lending institutions have acknowledged their limited impact among the very poor and have recently favored individual contracts. This paper attempts to understand these empirical patterns using a model in which there is a single investment project and access to credit is limited by weak repayment incentives. We show that in the absence of large social sanctions, the poorest borrowers are offered individual and not group contracts. When both types of contracts are feasible, the relative gains from group loans are shown to be decreasing in loan size. We compare the role of bank enforcement with social sanctions and find that bank enforcement is more effective in increasing outreach while social sanctions raise the welfare of infra-marginal borrowers. Finally, we explore the welfare effects of group size and find that those requiring small loans are better served by larger groups but group size effects are, in general, ambiguous.

Keywords: group lending, joint-liability, microcredit, repayment incentives, social sanctions.

JEL Classification: G21, I38, O12, O16

Suggested Citation

Baland, Jean-Marie and Somanathan, Rohini and Wahhaj, Zaki, Repayment Incentives and the Distribution of Gains from Group Lending (January 2011). CEPR Discussion Paper No. DP8197, Available at SSRN: https://ssrn.com/abstract=1749818

Jean-Marie Baland (Contact Author)

Facultés Universitaires Notre-Dame de la Paix (FUNDP) ( email )

8 Rempart de la Vierge
B-5000 Namur
Belgium

Rohini Somanathan

University of Delhi - Department of Economics ( email )

Delhi-110007
India

Zaki Wahhaj

University of Kent - Department of Economics ( email )

Keynes College
Kent, CT2 7NP
United Kingdom

University of Namur ( email )

8 Rempart de la Vierge
Namur, 5000
Belgium

University of Kent - School of Economics ( email )

CT2 7NP
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
4
Abstract Views
530
PlumX Metrics