Is Group Lending a Good Enforcement Scheme for Achieving High Repayment Rates?: Evidence from Field Experiments in Vietnam

This paper presents the limitations of group lending models in reducing defaults and moral hazards
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This paper argues that joint liability contracts are better incentives for borrowers since they discourage strategic defaults and achieve higher repayment rates as compared to individual lending methodology. The document further elaborates on the methodology and explains the following points:

  • Location of the survey;
  • Microfinance games used;
  • Joint liability being assigned to group members without disclosing member names;
  • Freedom to members to monitor each others' investment returns;
  • Possibility of cross-reporting.

The paper highlights the results of the experiment conducted and draws the following conclusions:

  • Introduction of monitoring made borrowers more likely to choose strategic default;
  • Cross reporting lead to elimination of selfish members;
  • Positive and significant coefficient of variance of investment returns in the groups indicated a perfect of risk sharing mechanism;
  • Joint liability created serious free-riding problems and reduced repayment rates.

It ends with a list of references, details of survey conducted, games and methodology adopted.

About this Publication

By Kono, H.