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Collateral and risk sharing in group lending: evidence from an urban microcredit program

Collateral and risk sharing in group lending: evidence from an urban microcredit program
Collateral and risk sharing in group lending: evidence from an urban microcredit program
Empirical research on group lending is extensive, but without allowance for collateral to mitigate strategic default. Indeed, lack of credit access has motivated microcredit in rural areas of developing countries, where agents with collateral are very rare. As rural communities have tight-knit hierarchical structures information about borrowers is accessible and enforcement of social sanctions makes collateral superfluous. First, we illustrate in a model how collateral mitigates group default. Second, we study a group lending program in Cotonou, the largest city in Benin with 1.1 million inhabitants. Results show diversification within groups facilitating risk pooling but also increasing expected default costs for safe borrowers. Risky borrowers offset group-default negative spillovers default with collateral, and facilitate credit access to safe borrowers. We find joint liability to be a mechanism for risk sharing in a setting where poor households lack resources for collateral and insurance markets are missing.
group lending, mutual cosigners, collateral, risk sharing, strategic default, bailout costs
504
University of Southampton
Kugler, Maurice
4c79c98c-1810-4351-bf16-faeec2227e45
Oppes, Rossella
15e03a04-33fa-4b59-81ed-422b259c5751
Kugler, Maurice
4c79c98c-1810-4351-bf16-faeec2227e45
Oppes, Rossella
15e03a04-33fa-4b59-81ed-422b259c5751

Kugler, Maurice and Oppes, Rossella (2005) Collateral and risk sharing in group lending: evidence from an urban microcredit program (Discussion Papers in Economics and Econometrics, 504) Southampton. University of Southampton

Record type: Monograph (Discussion Paper)

Abstract

Empirical research on group lending is extensive, but without allowance for collateral to mitigate strategic default. Indeed, lack of credit access has motivated microcredit in rural areas of developing countries, where agents with collateral are very rare. As rural communities have tight-knit hierarchical structures information about borrowers is accessible and enforcement of social sanctions makes collateral superfluous. First, we illustrate in a model how collateral mitigates group default. Second, we study a group lending program in Cotonou, the largest city in Benin with 1.1 million inhabitants. Results show diversification within groups facilitating risk pooling but also increasing expected default costs for safe borrowers. Risky borrowers offset group-default negative spillovers default with collateral, and facilitate credit access to safe borrowers. We find joint liability to be a mechanism for risk sharing in a setting where poor households lack resources for collateral and insurance markets are missing.

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More information

Published date: 2005
Keywords: group lending, mutual cosigners, collateral, risk sharing, strategic default, bailout costs

Identifiers

Local EPrints ID: 34792
URI: https://eprints.soton.ac.uk/id/eprint/34792
PURE UUID: e93f2355-f2f6-4cea-895d-d5274719b22a

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Date deposited: 16 May 2006
Last modified: 17 Jul 2017 15:49

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