Sequential lending with dynamic joint liability in micro-finance

Chowdhury, Shyamal and Roy Chowdhury, Prabal and Sengupta, Kunal (2014): Sequential lending with dynamic joint liability in micro-finance.

Abstract

This paper develops a theory of sequential lending in groups in micro-finance that centers on the notion of dynamic incentives, in particular the simple idea that default incentives should be relatively uniformly distributed across time. In a framework that allows project returns to accrue over time, as well as strategic default, we show that sequential lending can help resolve problems arising out of coordinated default, thus improving project efficiency vis-a-vis individual lending. Inter alia, we also provide a justification for the use of frequent repayment schemes, as well as demonstrate that, depending on how it is manifested, social capital has implications for project efficiency and borrower default. We next examine the optimal choices for the MFI and derive conditions for the optimality of the group lending arrangement. Our framework also provides for some plausible hypotheses as to why there has been a recent transition from group to individual lending.

• Item Type: MPRA Paper
• Language: English
• Keywords: Collusion; coordinated default; dynamic incentives; frequent repayment; group-lending; MFI competition; micro-finance; sequential financing; social capital; switch to individual lending
• Subjects: D - Microeconomics > D7 - Analysis of Collective Decision-Making; D - Microeconomics > D9 - Intertemporal Choice; G - Financial Economics > G2 - Financial Institutions and Services; O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy

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