Group lending, local information and peer selection

Ghatak, Maitreesh

doi:10.1016/s0304-3878(99)00035-8

Cited by 454 publications

(436 citation statements)

References 16 publications

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“…Examples on this type of approach abound. See, for example, Stiglitz (1990), Banerjee-Besley-Guinnane (1994), Besley-Coate (1995), Armendáriz (1999), Armendáriz-Gollier (2000), Ghatak (1999), Ghatak (2000), Conning (1999), Jain and Mansuri (2003), and Tedeschi (2006), among many others.…”

Section: Mission Drift From a Theoretical Standpointmentioning

confidence: 99%

On Mission Drift in Microfinance Institutions

Pérez‐Armendáriz

Szafarz

2011

The Handbook of Microfinance

162

150

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This paper sheds light on a poorly understood phenomenon in microfinance which is often referred to as a "mission drift": A tendency reviewed by numerous microfinance institutions to extend larger average loan sizes in the process of scaling-up. We argue that this phenomenon is not driven by transaction cost minimization alone. Instead, poverty-oriented microfinance institutions could potentially deviate from their mission by extending larger loan sizes neither because of "progressive lending" nor because of "cross-subsidization" but because of the interplay between their own mission, the cost differentials between poor and unbanked wealthier clients, and region-specific characteristics pertaining the heterogeneity of their clientele. In a simple one-period framework we pin-down the conditions under which mission drift can emerge. Our framework shows that there is a thin line between mission drift and crosssubsidization, which in turn makes it difficult for empirical researchers to establish whether a microfinance institution has deviated from its povertyreduction mission. This paper also suggests that institutions operating in regions which host a relatively small number of very poor individuals might be misleadingly perceived as deviating from their mission. Because existing empirical studies cannot tear apart between mission drift and crosssubsidization, these studies should not guide donors and socially responsible investors pertaining resource allocation across institutions offering financial services to the poor. The difficulty in tearing apart cross-subsidization and mission drift is discussed in light of the contrasting experiences between microfinance institutions operating in Latin America and South Asia. ABSTRACTThis paper sheds light on a poorly understood phenomenon in microfinance which is often referred to as a "mission drift": A tendency reviewed by numerous microfinance institutions to extend larger average loan sizes in the process of scaling-up. We argue that this phenomenon is not driven by transaction cost minimization alone. Instead, poverty-oriented microfinance institutions could potentially deviate from their mission by extending larger loan sizes neither because of "progressive lending" nor because of "cross-subsidization" but because of the interplay between their own mission, the cost differentials between poor and unbanked wealthier clients, and region-specific characteristics pertaining the heterogeneity of their clientele. In a simple one-period framework we pin-down the conditions under which mission drift can emerge. Our framework shows that there is a thin line between mission drift and cross-subsidization, which in turn makes it difficult for empirical researchers to establish whether a microfinance institution has deviated from its poverty-reduction mission. This paper also suggests that institutions operating in regions which host a relatively small number of very poor individuals might be misleadingly perceived as deviating from their mission. Because existing empirical stu...

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Section: Mission Drift From a Theoretical Standpointmentioning

confidence: 99%

On Mission Drift in Microfinance Institutions

Pérez‐Armendáriz

Szafarz

2011

The Handbook of Microfinance

162

150

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“…Enforcement means the ability to execute the loan contracts previously accorded to the borrowers (Bhattamishra & Barrett, 2010;Hung, 2006;Stiglitz, 1990). The absence or insufficient level of enforcement is expected to act as positive feedback to the moral and adverse selection risks, in that the absence of any sanctions against delinquent behavior encourages borrowers to engage in opportunistic behavior (Bhatt & Tang, 1998;Ghatak, 1999;Ghatak & Guinnane, 1999).…”

Section: Moral and Adverse Selection Risks: The Credit Dilemma And Thmentioning

confidence: 99%

“…This device conditions the repayment terms of each borrower participating in an LG to the repayment performance of all of the LG's other borrowers (Ghatak, 1999). This means that these actors are held responsible not only for their own debts, but also for their LG peers' debts.…”

Section: Key Characteristics Of Lgs Detailsmentioning

confidence: 99%

“…LG methodology plays a fundamental role within these institutions, embodying the central mechanics of the majority of the MFIs currently operating in most countries and world regions (Bhatt & Tang, 1998;Bhattamishra & Barrett, 2010;Ghatak, 1999Ghatak, , 2002Stiglitz, 1990). The LGs' key contribution is a micro institutional arrangement that reduces transaction costs for both borrowers and MFIs, such that the impoverished individuals occupying the bottom of the pyramid -a priori considered non bankablebecome capable of solvency.…”

Section: Introductionmentioning

confidence: 99%

“…The LGs' key contribution is a micro institutional arrangement that reduces transaction costs for both borrowers and MFIs, such that the impoverished individuals occupying the bottom of the pyramid -a priori considered non bankablebecome capable of solvency. However, the simple adoption of the LG methodology does not guarantee the success of the lending operations oriented towards disenfranchised clients, since a LGs' capability to reduce transaction costs is affected by the institutional environment and the social capital surrounding the MFIs (Bhatt & Tang, 1998;Ghatak, 1999).…”

Section: Introductionmentioning

confidence: 99%

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Lending Groups and Different Social Capitals in Developed and Developing Countries

2016

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ResumoGrupos de empréstimo (GEs) e capital social são elementos primordiais para as muitas soluções em operações de microfinanças ao redor do mundo. No entanto, a capacidade dos GEs para reduzir os custos e os riscos de transações das instituições de microfinanças (IFM) são mediados pelo ambiente institucional. A partir desse pressuposto, discutimos as interações existentes entre os ambientes institucionais dos países desenvolvidos (anglosaxões e comunitários) e os países em desenvolvimento com diferentes estoques de capital social (individual, em rede e institucional), bem como as influências dessa interação sobre a eficácia dos GEs. Para tanto, construímos, a partir da perspectiva institucional de O. Williamson, um framework teórico que coloca em interação todos esses elementos e que permite analisar as suas principais relações dentro do contexto deste estudo. Com base nesse framework, propomos que, nos países em desenvolvimento e nos países anglo-saxões, tanto o estoque de capital social individual quanto o em rede são os mais importantes para a eficácia dos GEs. No entanto, em países anglosaxões, esses dois estoques de capital social são complementados por dispositivos formais de contratação. Nos países comunitários desenvolvidos, porém, os estoques de capital social institucional têm um impacto positivo mais forte sobre a dinâmica dos GEs.Palavras-chave: microfinança; grupos de empréstimo; capital social; ambiente institucional. AbstractLending groups (LGs) and social capital are two central elements to the many microfinance solutions operating around the world. However, LG effectiveness in reducing transaction costs and lending risks for microfinance institutions (MFIs) is mediated by institutional environments. Starting from this assumption, we discuss the existent interactions between the institutional environments of developed (Anglo-Saxon and communitarian) and developing countries with different stocks of social capital (individual, network and institutional) and the influences of this interaction on LG effectiveness. In order to do so, we applied the institutional perspective of O. Williamson to build a theoretical framework to examine the interaction of all these conditions, allowing for analysis of their main relations within the microfinance context. Based on this framework, we propose on the one hand that in developing and Anglo-Saxon developed nations, stocks of both individual and network social capital are the most important for an LG's effectiveness. However, in Anglo-Saxon countries, these two stocks of social capital are complemented by formal contracting devices. In communitarian developed countries, on the other hand, the stocks of institutional social capital have a stronger positive impact on LG dynamics.

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Microfinance

Offutt¹

2012

The Wiley‐Blackwell Encyclopedia of Globalization

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Microfinance has quickly become one of the most visible global initiatives in the fight against poverty. Bill Gates, George Soros, and Queen Sophia of Spain are just a few of the international spokespersons for microfinance. They join various other corporate sponsors, private foundations, multilateral institutions, and national governments that are promoting the industry's development and growth. Such sponsors are linked to more than 3500 microfinance institutions (MFIs) that serve more than 106 million impoverished clients on six different continents (Daley‐Harris 2009). The links that hold this transnational industry together are created and maintained through direct partnerships, umbrella organizations, international summits, advocacy and publicity campaigns, and the growing academic literature that explores its impact on cultures and societies.

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Group lending, local information and peer selection

Cited by 454 publications

References 16 publications

On Mission Drift in Microfinance Institutions

On Mission Drift in Microfinance Institutions

Lending Groups and Different Social Capitals in Developed and Developing Countries

Microfinance

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