Friends, Family and Fools: Cosigners and Repayment Performance in Microcredit
42 Pages Posted: 20 Feb 2014
Date Written: February 2014
We investigate the effect of kinship between borrowers and cosigners on repayment performance in microcredit, by using data coming from a leading Italian microfinance provider for the period 2009-2012. Estimates on a pool of 2,350 loans show that the presence of closely related cosigners tends to reduce loan defaults. We account for the presence of a cosigner with an instrumental variable built on the exogenous rule imposed by the lender that requires personal guarantees for loans exceeding € 5,000. We also attempt to disentangle the contribution of cosigners’ eventual financial support from the psychological pressure they may exert on debtors in order to foster repayment, while providing evidence backing both these possibilities. The positive relation we find between the borrowers’ repayment performance and the strength of their family ties with cosigners may therefore be the expression of two key components. On the one hand, family kinship may lead to stronger solidarity. On the other, close relatives are likely to exert more effective psychological pressure on the borrower than other categories of individuals.
Keywords: microfinance, cosigner, repayment, loan default
JEL Classification: G2, G21, F63, O1
Suggested Citation: Suggested Citation