Joint-liability Borrowing Decisions under Risk: Empirical Evidence from Rural Microfinance in Ethiopia

This paper investigates borrowing decisions of rural households from an MFI in Tigray, Ethiopia, using household panel data and a dynamic panel probit model. It considers risk involved in joint liability contracts and risk of losing future access to credit. Empirical results show that:

• Households consider contractual risk and future access to credit as important points while making credit decisions in risky environments;
• Probability of repeat borrowing is higher than probability of new participation;
• Perceived threat of punishment and perceived risk are higher than that in reality;
• Providing full-fledged credit services, including credit for consumption, might help to cope with risk after-shock and encourage household use of credit.

Finally, perceived joint liability threats deter participation, and easing stringent punishments might encourage households to come forward and use credit.