DEVELOPING MICROFINANCE OUTREACH IN URBAN COMMUNITIES THROUGH FAMILY TIES

Abstract

Normally, the group lending with joint liability will not perform efficiently under the weak social bondage such as in an urban area. This paper aims to study the mechanism to improve the efficiency of group lending transition in such a circumstance. From the results, we find out that the family ties can help solve group lending problems. The group lending with family ties can reduce the default on the loan and increase the efficiency of loan tracking via strong bonds between each members in the group. However, the weakness of groups with family ties comes from the fact that they are more sensitive to shock than the other groups with no family ties. In conclusion, In the strong social bondage situation like in the rural areas, group lending is efficient; while in the city, group lending with family ties can perform better than other forms of group lending even with the shocks. To confirm the prediction from the model, this study will study the repayment rates of several types of groups through the method of field experiment game. The experiment subjects were be divided into 3 groups: 1) Random matching groups 2) Self-selected groups and 3) Family ties groups. When the experiment ended, individual information were collected and the results were tested by ordered logit model. The conclusion of the experiment game confirms the prediction from the model that in the urban area the group lending with family ties gives a good outcome with the high efficiency of repayment rate, compared to the rates of repayment in random matching group lending and self selected group lending. When considering the effect of shocks on the loan default, the family ties group is the most effective type in transferring the shock among group members. Therefore, the family ties group can be more sensitive with loan default and tends to have higher chances of group loan default under shocks. The other factors that also affect the repayment rate of low income groups in the urban areas are remittance and multiple loan sources. Finally the field experiment game was used to test the adverse selection problem. The family ties can help ease the adverse selection problem due to the effective borrower's information sharing before the loan application.