A Study of Joint Liability vs. Individual Liability in Microfinance Institute with Respect to Default Rate (Loan Repayment)

This paper builds a theoretical model relating joint liability and individual liability with factors identified from a survey of relevant literature. It develops hypotheses based on the comparative study of joint and individual liability and their respective factors.

Joint liability helps to overcome problems of moral hazard and adverse selection. The paper states that:

• Self selection, monitoring and enforcement by group members in the joint liability model reduces operational costs and default rates;
• Joint liability increases outreach and improves portfolio quality;
• Factors associated with joint liability include loan size, interest rates, insurance, operational cost, social collusion and distance;
• Factors associated with individual liability include historical credibility, loan amount, income and wealth;
• Joint liability leads to social isolation of those who are unable to pay progressive loan amounts.

Findings from the literature survey have reinforced relationships used to build the theoretical model. These results are, however, highly contextual and time specific. The study highlights the need to conduct specific research to understand the model in the Indian context.