City Research Online

Abstract

We explore the hypothesis that traditional joint-liability microfinance programs fail to increase borrower incomes in part because they cannot screen out unproductive borrowers. In randomly selected villages in West Bengal, India, we implemented trader-agent-intermediated lending (TRAIL), in which local trader-lender agents were incentivized through repayment-based commissions to select borrowers for individual liability loans. In other randomly selected villages, we organized a group-based lending (GBL) program in which individuals formed 5-member groups and received joint liability loans. TRAIL loans increased the production of the leading cash crop by 27% and farm incomes by 22%. GBL loans had insignificant effects. We develop and test a theoretical model of borrower selection and incentives. Farmers selected by the TRAIL agents were more able than those who self-selected into the GBL scheme; this pattern of selection explains at least 30–40% of the observed difference in income impacts.

Publication Type:	Article
Additional Information:	© 2017. This manuscript version is made available under the CC-BY-NC-ND 4.0 license https://creativecommons.org/licenses/by-nc-nd/4.0/.
Publisher Keywords:	Agricultural finance, Agent-based lending, Group lending, Selection, Repayment
Subjects:	H Social Sciences > HD Industries. Land use. Labor H Social Sciences > HG Finance S Agriculture
Departments:	Bayes Business School > Finance
SWORD Depositor:	Symplectic Administrator

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