Determinants of Intra-Group Insurance in Microfinance: Evidence from Joint Liability Lending Programs in Malawi
1 Pages Posted: 24 Oct 2006
Date Written: October 2006
The success of group lending with joint liability has been partly attributed to its ability to induce group members to provide mutual insurance when a member fails to repay. Although theorists have proposed conditions under which group lending with joint liability encourages group members to provide mutual insurance once some group members fail to repay their loan, very little empirical research has been conducted to test the validity of such theories. The objective of this study was, therefore, to examine the extent to which intra-group insurance occurs and to investigate the underlying determinants of the willingness of group members to offer mutual insurance. The data used in the study is from Malawi, collected by the International Food Policy Research Institute (IFPRI) in collaboration with the Rural Development Department (RDD) of Bunda College of Agriculture. The data is from 99 farm and non-farm credit groups of the Malawi Rural Finance Company (MRFC).
Results revealed that although 90 percent of the borrowers accepted that they understood that they were supposed to contribute to repay loans for defaulting members in the group, only 48 percent expressed full willingness to offer that support. An analysis on factors influencing the willingness of members to provide mutual insurance revealed that factors of production as well as pre-existing social ties, dynamic incentives and risk pooling factors increased the likelihood that group members would be willing to support each other. The presence of new members in the group, which potentially introduces a matching problem, works against mutual insurance. The cost of insurance, captured by the variation in loan size among group members, reduces the willingness of peers to contribute to repay defaulted loans of their peers. Groups composed of members that are related to a village chief, and those that that were formed by the village chief are more likely to be willing to help each other when there is a repayment problem. In contrast, members in groups composed of members that were related to some politicians were unwilling to help each other in the event of a repayment problem.
Keywords: Intra-group insurance, joint liability, dynamic incentives, Malawi
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