Group versus Individual Lending in Microfinance
Microfinance is typically associated with joint\nliability of group members. However, a large part of microfinance institutions rather\noffers individual instead of group loans. We analyze the incentive mechanisms\nin both individual and group contracts. Moreover, we show that microfinance\ninstitutions offer group loans when the loan size is rather large,\nrefinancing costs are high, and competition between microfinance\ninstitutions is low. Otherwise, individual loans are offered. Interestingly,\nour analysis predicts that individual lending in microfinance will gain in\nimportance in the future if microfinance institutions continue to get\nbetter access to capital markets and if competition further rises.