Optimal Group Size in Microlending

Protter, P., Quintos, A. Optimal group size in microlending. Ann Finance (2021). https://doi.org/10.1007/s10436-020-00382-0

15 Pages Posted: 30 Jun 2020 Last revised: 26 Jan 2021

See all articles by Philip Protter

Philip Protter

Columbia University

Alejandra Quintos

Columbia University - Department of Statistics

Date Written: June 2, 2020

Abstract

Microlending, where a bank lends to a small group of people without credit histories, began with the Grameen Bank in Bangladesh, and is widely seen as the creation of Muhammad Yunus, who received the Nobel Peace Prize in recognition of his largely successful efforts. Since that time the modeling of microlending has received a fair amount of academic attention. One of the issues not yet addressed in full detail, however, is the issue of the size of the group. Some attention has nevertheless been paid using an experimental and game theory approach. We, instead, take a mathematical approach to the issue of an optimal group size, where the goal is to minimize the probability of default of the group. To do this, one has to create a model with interacting forces, and to make precise the hypotheses of the model. We show that the original choice of Muhammad Yunus, of a group size of five people, is, under the right, and, we believe, reasonable hypotheses, either close to optimal, or even at times exactly optimal, i.e., the optimal group size is indeed five people.

Keywords: Microcredit, Microlending, Group Lending, Group Size

JEL Classification: C02, C60, G21

Suggested Citation

Protter, Philip and Quintos, Alejandra, Optimal Group Size in Microlending (June 2, 2020). Protter, P., Quintos, A. Optimal group size in microlending. Ann Finance (2021). https://doi.org/10.1007/s10436-020-00382-0, Available at SSRN: https://ssrn.com/abstract=3622257 or http://dx.doi.org/10.2139/ssrn.3622257

Philip Protter

Columbia University ( email )

Mail Code 4403
New York, NY 10027
United States
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HOME PAGE: http://www.stat.columbia.edu/~protter/

Alejandra Quintos (Contact Author)

Columbia University - Department of Statistics ( email )

Mail Code 4403
New York, NY 10027
United States

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