Sequential Group Lending: A Mechanism to Raise the Repayment Rate in Microfinance

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Abstract

This paper compares three lending mechanisms used by microfinance organizations, namely individual lending, simultaneous group lending and sequential group lend cotract enforcement is weak, sequential group lending unambiguously achieves the highest repayment rate. Hence sequential group lending can operate in settings in which simultaneous group lending and individual lending are not feasible due to weak contract enforcement. Simultaneous lending in contrast achieves the highest repayment rate if the level of official contract enforcement is high and if the likelihood of default is relatively low.

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