Monitoring Microcreditors Monitoring of Micro-Creditors

Monitoring Microcreditors

Monitoring of micro-creditors

Monitoring microcreditors: The work of loan officers to screen, monitor and collect repayments

Monitoring microcreditors: The work of loan officers to screen, monitor and collect repayments

Screening

Because microcredit loans are often made to very poor individuals in the developing world, repayment is a serious consideration for loan officials. In the screening process, ability to repay the loan is an obvious consideration. However, the usual subjects of microfinance are not always, on their surface, good credit risks. Thus different strategies must be deployed in the evaluation of borrowers. For example, to mitigate the risk for lenders, improve collections and thus increase the incentive for lenders to expand access to credit in the developing world at reasonable rates, a diverse range of financial instruments have been adapted by microfinancers. Two of the most popular are group liability and group lending. They are "often cited as a key innovation responsible for the expansion of access to credit for the poor in developing countries" (Gine & Karlan, 2008, p.2).

Monitoring

Group liability and group lending can improve the monitoring process by instituting social as well as institutional pressures to repay loans. "Group liability refers to the terms of the actual contract, whereby individuals are both borrowers and simultaneously guarantors of other clients' loans" (Gine & Karlan, 2008, p.6). There is community participation in borrowing and monitoring fellow lenders. Group lending is a more diffuse term, meaning that there is a "group aspect to the process or program, perhaps only logistical, like the sharing of a common meeting time and place to make payments" (Gine & Karlan, 2008, p.2). While not as effective as group liability, group lending can also foster a sense of community participation and improve surveillance. Social mirroring can increase the likelihood of repayment, if others in the group note that their peers are intent upon repaying the loans. Both strategies make repayment a communal and social obligation, rather than foster adversarial relationships between the community and the lender. In traditional societies where community standards are important, group lending and liability can be more effective than traditional methods of monitoring.

"Under group liability, clients have an incentive to screen other clients so that only trustworthy individuals are allowed into the program. In addition, clients will make sure that funds are invested properly and effort exerted. Finally, enforcement is enhanced because clients face peer pressure, not just legal pressure, to repay their loans. Thus, by effectively shifting the responsibility of certain tasks from the lender to the clients, group liability claims to overcome information asymmetries typically found in credit markets, especially for households without collateral" (Gine & Karlan, 2008, p.2).Social collateral becomes a replacement for financial collateral.

Additionally, the data suggests that when individuals alone have liability there is less monitoring of one another other's loans although "this lowered monitoring does not lead to higher default" statistically (Gine & Karlan, 2008, p.2).However, lenders "with weaker social networks prior to the conversion are more likely to experience default problems after conversion to individual liability, relative to those who remain under group liability" (Gine & Karlan, 2008, p.2).

Collection