Paper

Determinants of Intra-group Insurance in Microfinance: Empirical Evidence from Joint Liability Lending Schemes in Malawi

What are the primary determinants of intra-group insurance in microfinance?
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In this paper, the author presents an empirical study of 99 credit groups of the Malawi Rural Finance Company (MRFC). The objective of the study was to examine determinants of intra-group insurance among 99 credit groups of the MRFC from Malawi.The author explores the ability of the joint liability mechanism to:

  • Reduce problems of information asymmetry,
  • Enforce repayment,
  • Build the ability of the group members to provide mutual insurance when a member fails to repay.

The primary findings of this study include:

  • The cost of insurance, captured by the variation in loan size among group members, reduces the capability and willingness of members to provide mutual insurance.
  • The findings on risk diversification signify the importance of risk pooling factors in enhancing the group's ability to provide mutual insurance.
  • The likelihood of the willingness to provide mutual insurance among group members varies with:
    • The cost of insurance,
    • Risk pooling factors,
    • Productivity shifters,
    • Dynamic incentives,
    • Social ties.
  • Peer monitoring is statistically insignificant.

The author is of the opinion that the implication of these findings for group lending, as a tool for poverty alleviation, is that:

  • Risk diversification, social ties, dynamic incentives and productivity shifter are a recipe for successful intra-group insurance.
  • When such factors are carefully considered at the group design stage, peer monitoring will not be necessary.

About this Publication

By Simtowe, F.
Published