Repayment Behavior under Joint Liability LoanContracts in a Competitive Environment

In this paper we empirically examine the impact of competition between Microfinance Institutions(MFIs) on the efficacy of loan contracts when the MFIs make use of joint liability loan contracts. Morespecifically, we aim to find out whether competition will reduce the power of the self-selection processbetween the groups of borrowers, whether the peer measures within the groups of borrowers aredifferent in an environment of competing MFIs and to what extent changes in the intra groupbehaviour have an impact on the repayment performance of the borrowers. We show that in acompeting environment borrowers do not match anymore in groups of homogenous risks. We furthershow that the missing self-selection is compensated by a more intense and effective monitoringprocess and by a higher willingness of the group to repay the loans of delinquent borrowers. Weconclude that the main advantage of competition between MFIs – namely lower direct borrowing costdue to lower interest rates – may be overcompensated by higher indirect costs which specificallyarise when using joint liability contracts....