Comparing the Effectiveness of Group Liability Contracts and Individual Liability Contracts by Bangladeshi Microfinance Institutions
AuthorIslam, Schinria R.
AdvisorMetts, Robert L.
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Microfinance, the provision of financial services to low-income people, assists over 67 million people in over 100 countries worldwide. One aspect of microfinance is the extension of small loans, or microloans, to those in poverty who wish to pursue entrepreneurial ventures. Known as the birthplace of the modern microfinance sector, Bangladesh today has the highest microfinance penetration rate in the world. There are two principal types of liability contracts employed by microfinance institutions in Bangladesh: group and individual liability. By examining the relationship between liability contract type and microfinance institution performance, this research addresses one of the most crucial topics in microfinance today and compares the efficacy of group liability contracts and individual liability contracts in Bangladesh. Through analysis of online sources and correspondence with Bangladeshi microfinance institutions and borrowers, the findings in this study suggest that individual liability contracts are more effective than group liability contracts because they are associated with higher portfolio quality and higher repayment rates.