Group lending without joint liability de Quidt, Jonathan; Fetzer, Thiemo; Ghatak, Maitreesh
Journal of development economics,
07/2016, Volume:
121
Journal Article
Peer reviewed
Open access
This paper contrasts individual liability lending with and without groups to joint liability lending. We are motivated by an apparent shift away from the use of joint liability by microfinance ...institutions, combined with recent evidence that a) converting joint liability groups to individual liability groups did not affect repayment rates, and b) an intervention that increased social capital in individual liability borrowing groups led to improved repayment performance. First, we show that individual lending with or without groups may constitute a welfare improvement over joint liability, so long as borrowers have sufficient social capital to sustain mutual insurance. Second, we explore how the lender's lower transaction costs in group lending can encourage insurance by reducing the amount borrowers have to pay to bail one another out. Third, we discuss how group meetings might encourage insurance, either by increasing the incentive to invest in social capital, or because the time spent in meetings can facilitate setting up insurance arrangements. Finally, we perform a simple simulation exercise, evaluating quantitatively the welfare impacts of alternative forms of lending and how they relate to social capital.
•Compare individual liability lending with and without groups to joint liability lending•Individual lending increases welfare over joint liability if borrowers have enough social capital.•Group meetings can encourage insurance.•Simulations evaluate quantitatively the welfare impacts.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK, ZRSKP
'Personal responsibility', one of the basic principles of social governance, requires one to be accountable for what one does. However, personal responsibility is far from the only norm ruling human ...interactions, especially in social and economic activities. In many collective communities such as among enterprise colleagues and family members, one's personal interests are often bound to others'-once one member breaks the rule, a group of people have to bear the punishment or sanction. Such a mechanism is termed 'joint liability'. Although many real-world cases have evidenced that joint liability can help to maintain collective collaboration, a deep and systematic theoretical analysis on how and when it promotes cooperation remains lacking. Here, we use evolutionary game theory to model an interacting system with joint liability, where one's losing credit could deteriorate the reputation of the whole group. We provide the analytical condition to predict when cooperation evolves and analytically prove that in the presence of punishment, being jointly liable greatly promotes cooperation. Our work stresses that joint liability is of great significance in promoting current economic prosperity.
We present evidence from a randomized field experiment in rural Mongolia to assess the poverty impacts of a joint-liability microcredit program targeted at women. We find a positive impact of access ...to group loans on female entrepreneurship and household food consumption but not on total working hours or income in the household. A simultaneously introduced individual-liability microcredit program delivers no significant poverty impacts. Additional results on informal transfers to families and friends suggest that joint liability may deter borrowers from using loans for noninvestment purposes with stronger impacts as a result. We find no difference in repayment rates between both types of microcredit.
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When will solidarity, which emerges spontaneously from the fear of spillovers, be reinforced through contracting? The optimal pact between countries that differ substantially in their probability of ...distress is a simple debt contract with market financing, a borrowing cap, but no joint liability. While joint liability augments total surplus, the borrowing country cannot compensate the deep-pocket guarantor. By contrast, the optimal pact between two countries symmetrically exposed to shocks with an arbitrary correlation is a simple debt contract with joint liability, provided that shocks are sufficiently independent, spillovers sufficiently large, liquidity needs moderate, and available sanctions sufficiently tough.
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Group lending with covariate risk Ahlin, Christian; Debrah, Godwin
Journal of development economics,
June 2022, 2022-06-00, Volume:
157
Journal Article
Peer reviewed
Group-based lending with joint liability has been a major tool microfinance institutions (“MFIs”) have employed to improve lending feasibility. The related theoretical literature typically assumes ...borrowers face independent risk. This paper examines how covariate risk affects the usefulness of joint liability lending, in the hidden-information setting of Stiglitz and Weiss (1981) and Ghatak (2000). In a benchmark setting where all agents face the same degree of covariate risk, greater correlation renders group lending less effective; this is because the effective rate of joint liability is reduced when borrowers are more likely to fail together. We focus on a setting where the extensive and intensive margins are distinguished: some agents face independent risk while others face correlated risk. We find that an intermediate prevalence of correlated risk can lead to lower outreach than both a low and a high prevalence. Thus, reaching a market with mixed covariate risk profiles, e.g. farmers and micro-entrepreneurs, can be harder than reaching markets with a single profile of either kind. Assuming limited ability of lenders to use information on borrower correlatedness, we find that higher outreach is often achievable by separately servicing correlated and non-correlated borrowers. This can help explain the existence of specialized institutions such as agricultural banks versus standard microenterprise-focused MFIs.
•Covariate risk reduces the effectiveness of group lending under adverse selection•Lending outreach can be lowest when covariate risk is moderately prevalent•Separately servicing high- and low-correlation borrowers often increases outreach•Results explain dichotomy between microfinance institutions and agricultural banks
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NLZOH, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UILJ, UL, UM, UPCLJ, UPUK, ZAGLJ, ZRSKP
Microfinance is used to enhance micro and small enterprise start-up and growth in developing countries. Although there is some discussion of how microfinance institutional activities lead to their ...own sustainability in the extant literature, the same cannot be said of the ways in which microfinance institutions shape the sustainability agendas of micro and small enterprises (MSEs). In this paper, we conceptualise and explain the way that joint liability lending in microfinance shapes the sustainability of micro and small enterprises owned by borrowers. Using sustainable leadership as a theoretical foundation, we conceptualise the strategic, operational, and community-level leadership functions associated with joint liability and construct a framework. Based on the conceptual framework, we also develop propositions and explain them using an illustrative case study. Our conceptual work reveals that leadership tasks at strategic, operational, and community levels influence MSEs’ sustainability. Our conceptual framework, propositions, and illustrative case evidence contribute to theory and practice by highlighting that joint liability mechanisms are a possible pathway for MFIs to facilitate sustainable initiatives in micro and small enterprises.
Microfinance is an emerging phenomenon that opens access to capital for individuals previously shut out from financial services. In its direct engagement with the poor, microfinance represents a new ...way for financial capital to potentially stimulate economic growth in developing countries. However, microfinance is poorly understood, and it remains unclear whether it delivers on its promises. The goal of this paper is to introduce the topic of microfinancing to a wider audience of management researchers and to identify opportunities for future research in this new and growing area.
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As stated in the last phrase of the Article 249 of the Commercial Code of Iran, the guarantor has only joint liability with the person to whom the guarantee is given. This has limited the scope of ...guarantor's liability and enables him/her to rely on objections on which the principal debtor can also rely. Nevertheless, the question that is raised in the scope of guarantor's liability and its limitation to the liability of the creditor is: in case of the principal debtor's incapacity or his signature being forged, can the guarantor, too, as for the last part of aforementioned Article consider himself/herself exempt from liability? The Iranian law legislators did not provide a clear answer to the above question, but the French Law and the Geneva Convention and UNCITRAL, meanwhile accepting independence for guarantor's liability, maintain that the guarantor alongside the other signatories has a joint liability. In the Iranian Law, despite the silence of the legislators, one may consider this solution: in the engagement per se, there is no subjacency. Thus in case of signature forgery of the principal debtor or his incapacity, guarantor's engagement, although independently, finds actuality and as an exception to the decree of the last part of Article 249 of the Commercial Code, although the principal debtor in these suppositions has no liability for the holder of commercial instrument, the guarantor is obligated to pay the money.
Incentivizing unobservable effort in risky environments, such as in insurance, credit, and labor markets, is vital as moral hazard may otherwise cause significant welfare losses including the ...outright failure of markets. Ensuring incentive-compatibility through state-contingent contracts between principal and agent, however, is undesirable for risk-averse agents. We provide a theoretical intuition on how pro-social preferences between agents in a joint liability group contract can ensure incentive-compatibility. Two independent large-scale behavioral experiments framed in an insurance context support the hypotheses derived from our theory. In particular, effort decreases when making agents' payoff less state-dependent, but this effect is mitigated with joint liability in a group scheme where agents are additionally motivated by pro-social concerns. Activating strategic motives slightly increases effort further; particularly in non-anonymous groups with high network strength. The results support existing evidence on joint liability groups and further suggest that even if peer pressure to ensure effort provision is absent, such group policies can improve efficiency when agents are pro-social.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NLZOH, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK, ZRSKP
The limited liability company (LLC) is regarded as a significant contributor to the national economy. Many people use it because they believe their liability is limited to the amount of their capital ...share. The UAE lawmaker recognized this in the Commercial Companies Law No. 32 of 2021, when it identified cases in which the partners’ liability for debts and obligations becomes personal and joint in the event of violation of the law or fraud by the partners or managers of the company. As a result, the capital is not the only guarantee for the creditors of the company. This study aims to analyze the legal texts and elucidate the cases in which the partners' liability is regarded personal and joint.
Limited liability; Personal liability; Joint liability.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NLZOH, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UILJ, UL, UM, UPCLJ, UPUK, ZAGLJ, ZRSKP
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