'New' Microfinance? Informal Credit and Group Lending in Competitive Markets
Bocconi University, Paolo Baffi Centre Working Paper No. 156
Posted: 6 Jun 2003
Date Written: February 2003
In a given geographical area, what happens when a farmer, a craftsman, or a small merchant can choose between participating in a group lending or resorting to an informal money-lender? This paper presents a theoretical model that examines such situations, placing group lending and informal credit in a competitive market context. The results indicate that the higher the value of the borrower's assets, the more he will tend to prefer group lending. Then if policymakers desire to facilitate access to group lending to poorer classes, it would seem advisable for them to exclude access to group lending for owners of assets that exceed certain thresholds, and to exclude assets that may have a special value for the borrower. Also, the lower the value the borrowers place to reputation, and the more the non-governmental organization (NGO) proposing the group lending contract is capable of offering effective non credit services and be efficient in organizing its structure, the more he will favour group lending. Then, before to introduce the group lending in a given area, the NGO should understand carefully the economic and social features of the community to which it is extending credit; furthermore the supply of group lending is consistent with the hard budget constraint. Finally group lending does not seem to offer particular risks of adverse selection. Therefore group lending can be viewed as perfectly consistent with a market approach.
Keywords: microfinance, group lending, informal credit, competitive markets
JEL Classification: D28, G20, G21, I14, O16, O17
Suggested Citation: Suggested Citation