Monitoring Microcreditors Monitoring of Micro-Creditors Research Proposal

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"Under group liability, clients have an incentive to screen other clients so that only trustworthy individuals are allowed into the program. In addition, clients will make sure that funds are invested properly and effort exerted. Finally, enforcement is enhanced because clients face peer pressure, not just legal pressure, to repay their loans. Thus, by effectively shifting the responsibility of certain tasks from the lender to the clients, group liability claims to overcome information asymmetries typically found in credit markets, especially for households without collateral" (Gine & Karlan, 2008, p.2).Social collateral becomes a replacement for financial collateral.

Additionally, the data suggests that when individuals alone have liability there is less monitoring of one another other's loans although "this lowered monitoring does not lead to higher default" statistically (Gine & Karlan, 2008, p.2).However, lenders "with weaker social networks prior to the conversion are more likely to experience default problems after conversion to individual liability, relative to those who remain under group liability" (Gine & Karlan, 2008, p.2).

Collection

Not every microfinancer is a fan of group monitoring: under group monitoring, as the loan is paid back collectively, even if individuals do not want to default, they cannot pay back the loan unless every member of the group does so as well.

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A preferred method for high-risk groups is to create even more stringent methods of monitoring. Sequential lending means that "borrowers in a group do not all get the loan at the same time but sequentially, or monitoring by the lender combined with joint liability" which makes self-monitoring even more vitally important for group members, as they cannot get a loan unless other members of the group are already making payments (Gine & Karlan, 2008, p.8).

Reference

Gine, Xavier & Dean S. Karlan. (2008, January). Peer monitoring and enforcement:

Long-term evidence from microcredit lending groups with and without group liability.

World Bank. Retrieved November 21, 2009….....

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