Group Lending Without Joint Liability

52 Pages Posted: 31 Jul 2013

See all articles by Jon de Quidt

Jon de Quidt

London School of Economics & Political Science (LSE)

Thiemo René Fetzer

London School of Economics & Political Science (LSE)

Maitreesh Ghatak

London School of Economics (LSE) - Department of Economics

Date Written: July 2013

Abstract

This paper contrasts individual liability lending with and without groups to joint liability lending. By doing so, we shed light on an apparent shift away from joint liability lending towards individual liability lending by some microfinance institutions First we show that individual lending with or without groups may constitute a welfare improvement so long as borrowers have sufficient social capital to sustain mutual insurance. Second, we explore how a purely mechanical argument in favor of the use of groups - namely lower transaction costs - may actually be used explicitly by lenders to encourage the creation of social capital. We also carry out some simulations to evaluate quantitatively the welfare impact of alternative forms of lending, and how they relate to social capital.

Keywords: group lending, joint liability, micro finance, mutual insurance

JEL Classification: G11, G21, O12, O16

Suggested Citation

de Quidt, Jon and Fetzer, Thiemo René and Ghatak, Maitreesh, Group Lending Without Joint Liability (July 2013). Available at SSRN: https://ssrn.com/abstract=2304082

Jon De Quidt (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Thiemo René Fetzer

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://personal.lse.ac.uk/fetzert

Maitreesh Ghatak

London School of Economics (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom
44 20 7852 3568 (Phone)
44 20 7955 6951 (Fax)

HOME PAGE: http://sticerd.lse.ac.uk/dps/adds/ghatak/cv-lse-sept02.pdf

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