GROUP LENDING, REPAYMENT INCENTIVES AND SOCIAL COLLATERAL

In this paper, we investigate the impact on repayment rates of lending to groups which are made jointly liable for repayment. This type of s cheme, especially in the guise of the Grameen Bank in Bangladesh, has received increasing attention. We set up and analyze the 'repayment ga me' which group lending gives rise to. Our analysis suggests that such schemes have both positive and negative effects on repayment rates. T he positive effect is that successful group members may have an incent ive to repay the loans of group members whose projects have yielded in sufficient return to make repayment worthwhile. The negative effect ar ises when the whole group defaults; even when some members would have repaid under individual lending. We also show how group lending may ha rness social collateral, which serves to mitigate its negative effect.