Academic journal article Atlantic Economic Journal

Joint-Liability in Microcredit: Evidence from Bangladesh

Academic journal article Atlantic Economic Journal

Joint-Liability in Microcredit: Evidence from Bangladesh

Article excerpt

"Give a man a fish and he will eat for a day. Give a woman microcredit, and she, her husband, her children, and her extended family will eat for a lifetime" (Bono 2010, page 1).

But who feeds (repays) the lender?

Introduction

Microcredit has grown exponentially since 1983 and is viewed as a revolutionary tool for global poverty alleviation (Yunus 1999). (1) The rise in prominence is attributed to the joint-liability lending model pioneered by Grameen Bank whereby traditional lender requirements for physical collateral are bypassed through mutual responsibility for individual loans. Theoretical hypotheses predict microcredit groups outperform others in the joint-liability setting, however the extent to which this contributes to repayment rates in excess of 95 % in microcredit remains unexplained. The shift in world industry structure toward for-profit lenders (2) means sustainability of this annual US$ 38 billion (3) global market is contingent on the application of these theories in practice.

Theoretical hypotheses predict sustainable long-run repayment as microcredit groups foster positive non-economic social ties from interactions. From a borrower perspective, joint-liability suggests individuals in microcredit groups show moral discipline by foregoing short-run benefits from non-repayment in preference for long-run dynamic gains from repayment. Joint-liability success utilises social ties between microcredit borrowers (Besley and Coate 1995; Ghatak and Guinnane 1999); however it incentivizes free riding (Kono 2013). There remains dispute among lenders on the optimal observable individual and group characteristics to maximise repayment.

Empirical results from repeated experimental games used to model joint-liability settings are applied alongside questionnaire findings to test the theoretical hypotheses, with particular focus on differences between treated microcredit borrower groups compared to the control non-microcredit borrower groups. (4) The author conducts the games in the district of Manikganj, Dhaka, Bangladesh.

Results from the joint-liability games show evidence of treated groups more likely choosing repayment and subsequently partaking in more rounds compared to control groups. This holds even controlling for unobservable development of relationships over time among treated groups. Treated individuals also comparatively forego short-run gains from non-repayment to benefit from higher long-run dynamic gains. Furthermore they are less likely to free ride and more likely to shoulder (support) partners compared to controls, suggesting relative fostering of social ties. From a lender perspective, this paper identifies characteristics including female-gender and neighbours that optimise repayment. However it finds factors such as income and age are insignificant contrary to popular thought.

Related Literature

Microcredit gained traction subsequent to implementation of joint-liability lending. (5) Between 1997 and 2005 the number of clients increased by 740 % and institutions by 406 %. (6) Higher market concentration and transition toward for-profit lenders demand repayment rates in excess of 95 % for sustainability (Hossain 1988; Morduch 1999). (7) Theoretically, joint-liability success revolves around social ties within groups which counteract three key problems: (8) moral hazard (9) (Banetjee et al. 1994; Laffont and Rey 2003), adverse selection (10) (Ghatak 1999; Gangopadhyay et al. 2005), and free riding" (Besley and Coate 1995; Wydick 2001; Bhole and Ogden 2010). This paper isolates free riding, extending games by Kono (2013) by setting income exogenously and randomly selecting participants to control for moral hazard and adverse selection respectively.

Focusing therefore on social ties (12) as a solution to free riding, Besley and Coate (1995) and Ghatak and Guinnane (1999) theoretically prove high social ties deter group member shirking on repayments. …

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