Technology Replaces Culture in Microcredit Markets: The Case of Italian MAGs
This paper argues that the joint liability model of microcredit is effective in serving clients belonging to rural community. However it would not be effective for clients belonging to urban industrialized areas:
- In rural communities, it works since the local information network is strong and peer pressure from fellow villagers induces repayment pressure;
- People who live in cities are less likely to know each other and hence the peer selection mechanism would not occur.
The paper proposes an alternative microcredit instrument that, like joint liability, mitigates informational problem and fits to urban context. Based on the data collected from three micro-credit institutions is Western Europe, the paper concludes that:
- Best clients, in terms of repayment rate, are represented by co-operatives;
- Associations and individual entrepreneurs display less reliability.
The paper argues that targeting co-operatives rather than associations or individual firms would be a good lending strategy.Based on the above observations, the paper develops a theoretical model of lending, which the authors name as Production team lending:
- In this methodology, loans are provided to borrowers who form production teams and chose between two production technologies:
- O-ring technology, i.e. co-operatives - if one partner does not perform the whole project fails;
- Standard technology, where the value of project is zero only if all members fail.
The paper states that:
- Only teams which adopt O-ring technology receive money as they are formed by good borrowers;
- This methodology attracts people who desire to work at the same project with the members having mainly technological and financial links.
The paper concludes that targeting teams with high degree of co-ordination among tasks is a good lending strategy when there is no collateral and social capital is weak.
