Borrower Empowerment and Savings: A Two-stage Micro-finance Scheme

Roy Chowdhury, Prabal (2007): Borrower Empowerment and Savings: A Two-stage Micro-finance Scheme.

Abstract

We consider group-lending with joint liability where the provision of loans is conditional on prior savings. In a dynamic model with moral hazard and endogenous group-formation, we examine the effect of such schemes on the allocation of loans between strongly and weakly empowered borrowers. We find that he savings requirement may help to screen out weak borrowers. Further, as long as the borrowers are not too similar, it increases the incentive for ``positive assortative matching (PAM).'' For intermediate interest rates, group-lending leads to ``PAM'' with a screening out of weak borrowers. It is thus feasible, whereas individual lending, which does not allow for such screening, is not. Interestingly, for relatively high interest rates, individual lending may dominate group-lending.

• Item Type: MPRA Paper
• Institution: Indian Statistical Institute, Delhi Center
• Language: English
• Keywords: Assortative matching; empowered borrowers; joint liability lending; savings
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O12 - Microeconomic Analyses of Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O20 - General; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O15 - Human Resources ; Human Development ; Income Distribution ; Migration; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors ; Shadow Economy ; Institutional Arrangements; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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