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