Microfinance Horizon

Author: Adriana de la Huerta

Abstract:

It has been well documented in the theoretical economic literature that joint liability group-based lending helps to overcome the hurdles of adverse selection, moral hazard, auditing cost and enforcement by exploiting local information embodied in specific social networks. Much less attention has been given to explain how other features of microcredit contracts have opened up possibilities for microfinance. In this paper I use a novel panel dataset on household loans from a microcredit program in Thailand to analyze how social ties and different policies (such as compulsory savings and training) contribute to explain the success of the program in terms of repayment rates. Empirical results are consistent with the predictions of some joint liability lending models. I find that cooperation and the strength of official sanctions are positively associated with repayment in rural areas; and that the strength of social sanctions is positively correlated with repayment in both rural and urban areas. These results suggest that strong social ties increase the probability of repayment in both socioeconomic settings. The evidence also suggests that the degree of joint liability in the fund is negatively associated with repayment; and that practices such as requiring compulsory savings and providing training or information to borrowers are positive predictors of repayment in both rural and urban environments. The findings are robust to a number of specification checks.

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