Group lending as a mechanism for self-insuring default risk

Andreas Krause

doi:10.1007/s10436-024-00447-4

Group lending as a mechanism for self-insuring default risk

Research output: Contribution to journal › Article › peer-review

Abstract

We show that banks can provide loans at low costs to high-risk borrowers in the form of a group lending contract in which all members are jointly liable for their loans. By providing such contracts borrowers self-insure against some of the default risk the bank faces. We determine the optimal group size in a competitive banking system and find that it is reasonably small and borrowers internalize an increasing fraction of the risk the higher their risks are.

Original language	English
Pages (from-to)	97-106
Journal	Annals of Finance
Volume	21
Early online date	28 Jul 2024
DOIs	https://doi.org/10.1007/s10436-024-00447-4
Publication status	Published - 31 Mar 2025

Data Availability Statement

Data sharing is not applicable to this article as no new data were created or analyzed in this study.

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 1 No Poverty
SDG 5 Gender Equality
SDG 8 Decent Work and Economic Growth

Keywords

D82
G21
Group lending
Joint liability
Microfinance
O16
Self-insurance

ASJC Scopus subject areas

Finance
General Economics,Econometrics and Finance

Access to Document

10.1007/s10436-024-00447-4Licence: CC BY

Cite this

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AB - We show that banks can provide loans at low costs to high-risk borrowers in the form of a group lending contract in which all members are jointly liable for their loans. By providing such contracts borrowers self-insure against some of the default risk the bank faces. We determine the optimal group size in a competitive banking system and find that it is reasonably small and borrowers internalize an increasing fraction of the risk the higher their risks are.

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KW - Joint liability

KW - Microfinance

KW - O16

KW - Self-insurance

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ER -

Group lending as a mechanism for self-insuring default risk

Abstract

Data Availability Statement

UN SDGs

Keywords

ASJC Scopus subject areas

Access to Document

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