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Sequential lending with dynamic joint liability in micro-finance

Author

Listed:
  • Shyamal Chowdhury

    (University of Sydney)

  • Prabal Roy Chowdhury

    (Indian Statistical Institute, Delhi)

  • Kunal Sengupta

    (University of Sydney)

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 (rather than at a single point), 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 then examine the optimal choices for the MFI, demonstrating that the MFI opts for higher project sizes under group lending with limited collusion, and also provide a plausible explanation of the transition from group to individual lending.

Suggested Citation

  • Shyamal Chowdhury & Prabal Roy Chowdhury & Kunal Sengupta, 2014. "Sequential lending with dynamic joint liability in micro-finance," Discussion Papers 14-07, Indian Statistical Institute, Delhi.
    • Handle: RePEc:alo:isipdp:14-07
    as

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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    Cited by:

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    3. Adil EL Fakir & Richard Fairchild & Youssef Lamrani Alaoui & Dora Chan & Mohamed Tkiouat & Zaid Amer, 2024. "Kinship, gender and social links impact on micro group lending defaults," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 2527-2542, April.

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    More about this item

    Keywords

    Collusion; coordinated default; dynamic incentives; group-lending; micro-finance; sequential financing; social capital; social sanctions;
    All these keywords.

    JEL classification:

    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • G2 - Financial Economics - - Financial Institutions and Services
    • O2 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy

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