A Study of Joint Liability Versus Individual Liability in Micro Finance Institute with Respect to Default Rate (Loan Repayment)

Abstract

Microfinance institutes (MFI) have used the individuality scheme for decades however in order to increase the outreach and to overcome the hurdle of non ability of poor individual to provide collateral security joint liability scheme were introduced. Here in the joint liability model the social cohesion is undertaken as the collateral for the provision of the loans. These loans are provided for a group of members who are jointly responsible in case of default by any single member of group. Default rate is measured in order to understand the performance of the loan portfolio of a MFI or lender. The threat of the non provision of further loans have ensured the group members to enforce all the members to repay the installment and leading to decrease in the default rate. The joint liability has been explained by various authors majorly in three basic models namely adverse selection, peer monitoring and moral hazard. There have been studies to identify various factors for the both the individual liability and the joint liability with respect to default rate. This study is an attempt to survey the literature relevant to the individual and joint liability models and build a theoretical driven model in order to understand the factors which impact both joint liability and individual liability in terms of default rate. Loan size, interest rate and cost of operations have been found to be active factors impacting default rate for both the joint liability and individual liability. The research questions are formed on the basis of comparative study of the factors between the joint liability and individual liability and specific relations between factors of liability schemes.

Keywords: Adverse Selection, Assortative Matching, Default Rate, Individual Liability, Joint Liability, Moral Hazard, Peer Monitoring, Social Collusion