Microfinance with a Monopoly Lender

Abstract

This paper contrasts the behavior of lenders with market power with competitive lenders in an environment where borrowers are collateral-poor but lenders can use implicit or explicit joint liability, leveraging the social capital that borrowers might have among themselves. We show that joint liability is preferred by borrowers compared to standard loan contracts, and also by the monopolist when he can earn sufficiently high rents from the borrowers' social capital. We consider policy implications and several extensions, including investments in social capital by the borrowers and the lender and how they are affected by the lending arrangements, and allowing lenders to use coercive methods.