Liability Structure in Small-scale Finance : Evidence from a Natural Experiment

Microfinance, the provision of small individual and business loans, has witnessed dramatic growth, reaching over 150 million borrowers worldwide. Much of its success has been attributed to overcoming the challenges of information asymmetries in uncollateralized lending. Yet, very little is known about the optimal contract structure of such loans -- there is substantial variation across lenders, even within a particular setting. This paper exploits a plausibly exogenous change in the liability structure offered by a microfinance program in India, which shifted from individual to group liability lending. The analysis finds compelling evidence that contract structure matters: for the same borrower, required monthly loan installments are 6 percent less likely to be missed under the group liability setting, relative to individual liability. In addition, compulsory savings deposits are 19 percent less likely to be missed under group liability contracts.

Bibliographic Details

Main Authors:	Carpena, Fenella, Cole, Shawn, Shapiro, Jeremy, Zia, Bilal
Language:	English
Published:	2010-09-01
Subjects:	ACCESS TO FINANCIAL SERVICES, ACCOUNTING, ASSETS, BAD CLIENTS, BANK ACCESS, BANKING MARKET, BANKING SECTOR, BANKING SERVICES, BIASES, BORROWER, BORROWER PERFORMANCE, BORROWER WELFARE, BORROWING, BRANCH, BRANCHES, BUSINESS LOANS, CAPITAL ACCUMULATION, CLAIM, COLLATERAL, COMMERCIAL BANKS, COMPANY, COMPULSORY DEPOSIT, COMPULSORY DEPOSITS, COOPERATIVE SOCIETIES, CREDIT AGREEMENT, CREDIT COOPERATIVE, CREDIT COOPERATIVES, CREDIT MARKET, CREDIT MARKETS, CREDIT PROGRAM, CREDIT PROGRAMS, DEBT, DEBT REPAYMENTS, DEBTS, DEFAULT RATE, DEFAULT RATES, DEFAULTER, DEFAULTERS, DEFAULTS, DELINQUENCY RATE, DEPENDENT, DEPOSIT, DISBURSEMENT, DUMMY VARIABLE, EMERGING MARKETS, ENTREPRENEURS, ENTREPRENEURSHIP, EVENT OF DEFAULT, EXPENDITURE, FINANCIAL MARKET, FINANCIAL MARKETS, FINANCIAL SERVICES, FINANCIAL SUPPORT, FIRM SIZE, FIRST LOAN, FIRST-TIME BORROWERS, GROUP BORROWER, GROUP BORROWERS, GROUP CREDIT, GROUP LENDING, GROUP LOAN, GROUP REPAYMENT, GUARANTOR, GUARANTORS, HOUSEHOLDS, INCOME INEQUALITY, INDIVIDUAL LIABILITY, INDIVIDUAL LOAN, INDIVIDUAL LOANS, INFORMATION ASYMMETRIES, INFORMATION ASYMMETRY, INITIAL PUBLIC OFFERINGS, INSTALLMENT, INSTALLMENTS, INSURANCE, INSURANCE MECHANISMS, INTEREST PAYMENTS, INTEREST RATE, INTEREST RATES, INTERNATIONAL BANK, INVESTMENT CHOICE, INVESTMENT PROJECTS, JOINT LIABILITY, JOINT LIABILITY CLAUSE, LACK OF ACCESS, LEGAL CONSTRAINTS, LENDER, LENDERS, LENDING POLICIES, LENDING PORTFOLIO, LIABILITY, LIABILITY STRUCTURE, LIABILITY STRUCTURES, LIQUIDATION, LIQUIDITY, LOAN, LOAN AMOUNT, LOAN AMOUNTS, LOAN APPLICANT, LOAN CLIENT, LOAN CLIENTS, LOAN CONTRACT, LOAN CONTRACTS, LOAN DATA, LOAN DISBURSEMENT, LOAN OFFICERS, LOAN PERFORMANCE, LOAN PORTFOLIO, LOAN PRODUCT, LOAN PRODUCTS, LOAN REPAYMENT, LOAN REPAYMENTS, LOAN TERM, LOAN TERMS, MARKET FAILURES, MARKET STRUCTURE, MATURITY, MATURITY DATES, MEDIUM ENTERPRISE, MFI, MFIS, MICROCREDIT, MICROFINANCE, MICROFINANCE CLIENTS, MICROFINANCE INSTITUTION, MICROFINANCE ORGANIZATIONS, MICROFINANCE PRACTITIONERS, MICROFINANCE PROGRAM, MICROFINANCE PROGRAMS, MINIMUM BALANCE, MORAL HAZARD, OPTIMAL CONTRACT, OUTSTANDING LOANS, PENALTIES, PHYSICAL CAPITAL, POLITICAL ECONOMY, PREPAYMENTS, PROVISION OF CREDIT, REPAYMENT, REPAYMENT BEHAVIOR, REPAYMENT DISCIPLINE, REPAYMENT INCENTIVES, REPAYMENT PERFORMANCE, REPAYMENT RATES, REPAYMENT SCHEDULES, RESERVES, RISK SHARING, RISK TAKING, RISKY BORROWERS, SALARIES, SAVINGS, SAVINGS ACCOUNT, SAVINGS ACCOUNTS, SAVINGS DEPOSIT, SAVINGS DEPOSITS, SAVINGS GROUPS, SAVINGS PORTFOLIO, SAVINGS PRODUCTS, SAVINGS SERVICES, SECOND LOAN, SMALL FIRMS, SOCIAL CAPITAL, SOCIAL COLLATERAL, SUBSIDIZATION, TRANSACTION, TRANSACTION COSTS, URBAN AREAS, VILLAGE, WAGES, WITHDRAWAL, WORKING CAPITAL,
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20100920115522 https://hdl.handle.net/10986/3910
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