ABSTRACT
The study sought to address the impact of group lending on accessibility of micro credit facilities among low income households in rural and sub-urban regions of Keiyo South Sub-county. The study specifically sought; to determine the effect of joint liability on accessibility of micro credit; examine the effect of group size on accessibility of micro credit; determine the effect of group members’ education on accessibility of micro credit and to establish the impact of group diversity on accessibility of micro credit. Agency theory was applied in the study to intuit how group co-borrowers reduce agency costs by acting as agents to the microfinance institutions. This study adopted a descriptive research design. The study was conducted in Keiyo South Sub- county in Kenya; the target population was members of registered social organizations of 779 groups. Random sampling was used in the study to select groups while purposive sampling technique was subsequently used to select the two participating members. The primary data for the study was obtained using structured questionnaires. Reliability test of the instruments was done using Cronbach alpha coefficient. Analysis of the data was done using descriptive and inferential statistics. Descriptive statistics specifically mean and standard deviation were applied in the study and inferential statistics were Pearson correlation coefficient to test linear relationship between dependent and independent variables, while multiple regression model using t-test and p-values were used to test the hypotheses. The study revealed that joint liability (β1=0.205, p value 0.000<0.05), group size (β2=0.458, p value 0.000<0.05) and group members’ diversity (β4=0.122, p value 0.032<0.05) had a positive and significant effect on accessibility of microcredit facilities while group members’ education indicated an insignificant effect. This means that group lenders makes the decision to lend based on these factors other than group members’ level of education. The group needs to jointly share credit liability and put pressure on defaulters so as to prevent them from defaulting, have adequate number of members to curtail the problem of free-riding in larger groups and the need for diversity in the groups in terms of gender, age and ethnicity. With these in place, access to credit will be enhanced. The researcher therefore suggested that the study be conducted on a wider perspective to determine other factors that influence group lending on micro credit accessibility among low income households.
CHAPTER ONE
INTRODUCTION
Background of the Study
Globally, Access to credit plays a significant role in the lives of the poor households, particularly those that are plagued by financial shocks like illness and funerals. This role is central to contemporary debates surrounding strategies for poverty reduction and economic development. The majority of the people live in informal settlements and/or rural areas where poverty is still rife. Wilson (2006) points out that some survive below the minimum poverty level, usually the equivalent of US $1 per day. This makes these people to be exposed to even minor shocks which have detrimental effects on them (Mashigo, 2013). It is, therefore, difficult for the poor households to survive in the long run.
In developed countries such as UK and US, microfinance is associated with joint liability lending. When borrowers form groups and are held liable for each other, lending to the poor can be profitable even if borrowers do not possess any collateral and lack a credit history. Interestingly, however, a large part of microfinance institutions do not offer group but individual loan (Lehner, 2009). Group liability is often cited as a key innovation responsible for the expansion of access to credit for the poor in developing countries (Armenda´riz & Morduch, 2005).
According to Giné and Karlan (2006), the different features of group and individual lending schemes have not yet been studied in detail despite being a question of first order importance. Currently, the households find it difficult to access credit from the formal credit market due to the asymmetric information problem associated with adverse selection and moral hazard (Karlan & Zinman, 2008). This problem restricts access to credit and discourages the market from servicing the poor households who are regarded as unprofitable and risky. Improving access to credit and removing the constraints that have deterred the households from accessing credit can assist them to cushion themselves against the effects of financial shocks, thus reducing their vulnerability, poverty, and improving their living standards in general (Cassar, Crowley and Wydick 2007). The poor households, therefore, resort to group lending as an insurance mechanism of sorting between risky and non-risky members and to enforce and monitor contracts and regular payments. Studies show that the persistence of social interactions among informal groups as a way of improving social capital and deepening friendships and the benefits of contributing money together give the households a head start in their financial status (Al- Azzam, Carter and Sarangi 2011).
A growing range of financial institutions have developed an alternative lending mechanism that has turned around the conventional wisdom that lending to poor households is doomed to failure (State of the Micro credit Summit Campaign Report, 2005). Microfinance institutions (MFIs) as these are called share a commitment to providing poor households with very small loans to assist them start productive activities or grow their current small businesses. MFIs extend micro credit to poor household through innovative use of information that potential borrowers may have about each other resulting in high repayment rates. The hope is that much poverty can be mitigated by extending micro credit and financial services to poor households.
One innovation to extend credit to the poor that simultaneously addresses the asymmetric information problem and enforcement concerns lies in group lending; lending to self-selected groups of entrepreneurs who are jointly liable for a loan. Groups form voluntarily, and, while loans are made to individual in the group, all members of the group are held responsible for loan repayment by the entire group. (Karlan, 2011) stressed group lending’s informational and enforcement advantages over individual lending. Since group members are jointly liable for loan repayment, group lending can achieve better screening to dilute adverse selection, induces peer monitoring to contend moral hazard and provides group members with incentives to enforce loan repayments (Aniket, 2011).
Numerous theoretical papers have addressed the positive effects of group lending mechanisms. Aniket (2011) showed that group lending achieves self−selection of borrowers and acts as a screening device. Giné and Karlan (2010) found out that even if borrowers do not know each other’s type, group lending may be feasible due to lower interest rates as a result of cross subsidization of borrowers. Madajewicz (2011) conclude that social connections facilitate the monitoring and enforcement of joint liability loan contracts. This result has been confirmed in an empirical study by Karlan (2007). Furthermore, Maria (2009) point to a fall in transaction costs when instead of individual visits of clients group meetings are held. In addition, the contact with banks to which poor borrowers typically are not used to is facilitated. However, certain drawbacks of group lending exist. Giné and Karlan (2006) state that the demand for credit within a group may change over time, forcing clients with small loans to be liable for larger loans of their peers. Furthermore, the growth of group lending programs may slow down when new borrowers with looser social ties enter and, consequently, the group lending technology loses some of its power.
If group members do not have complete information about each other, then group lending may not lead to any improvements in loan repayment rates. This has also been shown in Laffont and N’Guessan (2000) that the burden of moral hazard problem between a borrowing member and the lender falls on the monitoring members who are responsible for repaying the loan of the defaulting member. They show that with an increasing cost of monitoring, a monitor can impose higher penalties on the borrowing member in the case of default, giving the borrowing member an incentive to choose a safer project.
Another set of theoretical papers focus on the strategic default strategies of group members. In the Warui (2012) model borrowers choose whether to repay or not after realizing projects returns by comparing the repayment amount with the severity of the official penalties imposed by the lender, and the unofficial penalties imposed by the other group members and the community. They show that group lending can improve repayment rates relative to individual lending given that social penalties are strong enough. Pereira and Mourao, (2012) argues that monitoring and the threat of social sanctions can prevent strategic default in group lending. In this model, a borrower can verify her partner’s true project returns at some cost and inflict sanction upon default.
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Item Type: Kenyan Topic | Size: 68 pages | Chapters: 1-5
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