Sequential Lending with Dynamic Joint Liability in Microfinance

This paper seeks to develop a theory of sequential lending in microfinance groups that centers on the notion of dynamic incentives. It finds that sequential lending can help resolve problems of coordinated default, thus improving project efficiency with regards to individual lending. The paper provides a justification for the use of frequent repayment schemes, as well as demonstrates that depending on how it is manifested, social capital has implications for project efficiency and borrower default. It further examines the optimal choices for MFIs and derives conditions for the optimality of group lending arrangements. The paper covers the following sections in detail:

• Discussion on the potential of sequential lending in improving MFI efficiency;
• Literature review with a focus on immediate and frequent repayment (IFR), sequential lending, and social capital;
• Examination of group lending schemes with a focus on two stage lending and the interaction between sequential lending and IFR;
• Discussion on a scenario where an MFI decides on number of borrowers, a common rate of interest, and a common loan size;
• Analysis of the preference to transit from group lending to individual lending in case of many MFIs.