DP9578 Group Lending Without Joint Liability

Author(s): Jonathan de Quidt, Thiemo Fetzer, Maitreesh Ghatak
Publication Date: July 2013
Keyword(s): group lending, joint liability, micro finance, mutual insurance
JEL(s): G11, G21, O12, O16
Programme Areas: Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9578

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.