A dynamic model of individual and group lending in developing countries

• Published in: Agricultural finance review Vol. 66; no. 2; pp. 251 - 265
• Main Authors: Katchova, Ani L., Miranda, Mario J., Gonzalez-Vega, Claudio
• Format: Journal Article
• Language: English
• Published: Bingley Emerald Group Publishing Limited 01.11.2006
• Subjects: Adverse selection; banking; Developing countries; econometric models; economic impact; ethics; farm credit; financial economics; financial institutions; group lending; history; Individual and joint liability contracts; interest (finance); joint liability; LDCs; literature reviews; loans; microcredit; microfinance; microfinance institutions; Microlending; Moral hazard; rural development; rural population; Strategic default; sustainable development; Uganda Rural Farmers Scheme; Uganda; Individual and joint liability contracts; Adverse selection; Microlending; Strategic default; Moral hazard
• ISSN: 0002-1466; 2041-6326
• DOI: 10.1108/00214660680001190

This paper examines the contract design problem of microfinance institutions seeking to maximize outreach to the poor while remaining financially sustainable. A dynamic model of group lending is developed that shows how optimal interest rates depend on information regarding moral hazard and adverse selection problems, correlated project risks, and strategic default. Relative to traditional static models, the results indicate a dynamic model better explains the current experience with individual and group lending in developing countries.