Sequential Lending: A Mechanism to Raise the Repayment Rate in Microfinance?
Abstract: This paper compares sequential and simultaneous group lending mechanisms in their ability to harness social sanctions when contract enforcement is incomplete. Sequential group lending entails giving credit to one borrower at a time under the condition that the previous borrower repaid her loan. This paper shows that under weak official contract enforcement sequential lending has a higher repayment rate than either simultaneous or individual lending. However the benefit of using sequential lending disappears as official contract enforcement improves. Under sufficiently strong official contract enforcement simultaneous lending achieves the highest repayment rate of all three lending mechanisms. Link