Edited by Sabri Boubaker, Douglas Cumming and Duc K. Nguyen
Lending small amounts of credit to people in a market with information asymmetries is difficult due to three main problems: adverse selection, moral hazard, and credit contract enforcement. These problems are magnified if borrowers do not have adequate collateral to secure the loan. In the microfinance context, microfinance organizations have used joint liability lending, which refers to a situation in which two or more borrowers are liable for repayment of a debt or obligation, and a lender can be compensated by them both individually or jointly. This lending technique, under certain situations, can help the lender to deal with the asymmetric information problems in the credit market, where information is costly. This chapter reviews and extends theoretical analyses of group lending, which provides insights about the relationship between group lending mechanisms and loan repayment performance. The analysis is based on the self-selection model or screening model, the self-monitoring model, and the self-enforcement model. This chapter extends the theories by applying different assumptions to see how the results change under different situations.
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