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 unc...
| Main Authors: | , , , |
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
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| Subjects: | |
| 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 http://hdl.handle.net/10986/3910 |
| Summary: | 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. |
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