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Defining Social Collateral in Microfinance Group Lending

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Microfinance Institutions

Part of the book series: Palgrave Studies in Impact Finance ((SIF))

Abstract

Microfinance institutions (MFIs) grant loans backed by social collateral to poor entrepreneurs whose incomes originate mostly from informal economic activities. As a consequence, MFIs are often committed to rely on soft information to assess borrowers’ credit-worthiness. Group lending with joint liability is seen as an effective instrument to circumvent information asymmetries because it incentivizes group members to use their social ties to screen, monitor, and enforce loan repayment on their peers. The social ties embed social capital and facilitate the collective actions of group members, allowing them to coordinate their repayment decisions and cooperate for their mutual benefit.

This research has been carried out in the framework of an ‘Interuniversity Attraction Pole’ on social enterprise, funded by the Belgian Science Policy Office. Ariane Szafarz acknowledges the financial support of F.R.S.-FNRS.

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Authors
  1. Luminita Postelnicu
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  2. Niels Hermes
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  3. Ariane Szafarz
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Editor information

Editors and Affiliations

  1. University of Agder, Norway

    Roy Mersland

  2. Oslo and Akershus University College and Telemark University College, Norway

    R. Øystein Strøm

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© 2014 Luminita Postelnicu, Niels Hermes, and Ariane Szafarz

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Postelnicu, L., Hermes, N., Szafarz, A. (2014). Defining Social Collateral in Microfinance Group Lending. In: Mersland, R., Strøm, R.Ø. (eds) Microfinance Institutions. Palgrave Studies in Impact Finance. Palgrave Macmillan, London. https://doi.org/10.1057/9781137399663_10

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