Microfinance Beyond Group Lending

Abstract

Microlending is growing in Eastern Europe, Russia and China as a flexible means of widening access to financial services, both to help alleviate poverty and to encourage private-sector activity. We describe mechanisms that allow these programmes to successfully penetrate new segments of credit markets. These features include direct monitoring, regular repayment schedules, and the use of non-refinancing threats. These mechanisms allow the programmes to generate high repayment rates from low-income borrowers without requiring collateral and without using group lending contracts that feature joint liability.

Keywords: Microfinance, transition, poverty relief, joint liability, repayment incentives

JEL Classification: D82, L14, O12, O17