Joint liability group lending is currently the lending technology of choice of microfinance institutions because of the success of the Grameen Bank, which is using the technology to successfully lend to millions of poor Bangladeshi women. The analysis and findings presented in this brief are the results of research undertaken by the International Food Policy Research Institute (IFPRI) and Bunda College of Agriculture on the practice and performance of joint liability group lending in Malawi. This research provides evidence on the extent to which peer selection, peer monitoring, and peer pressure are taking place in the credit groups affiliated to the Malawi Rural Finance Company (MRFC), the main microfinance institution in Malawi, and their impact on the joint liability on loan repayment. authorities have on the formation and com-positionCredit Malawi. ,Grameen Bank. ,Technology. ,Microenterprises Malawi Finance. ,Finance Developing countries. ,Rural credit Developing countries. ,Financial institutions. ,

Diagne, Aliou

English

Research Papers in Economics

R R U U R R A A L L     F F I I N N A A N N C C I I A A L L     P P O O L L I I C C I I E E S S    
f f o o r r     F F O O O O D D     S S E E C C U U R R I I T T Y Y     o o f f     t t h h e e     P P O O O O R R  
 
 
IFPRI 
 
 
 
 
 
 
 
RESEARCH 
PROGRAM 
MISSION 
The research 
program titled Rural 
Financial Policies 
for Food Security of 
the Poor seeks to 
identify policies and 
institutional 
arrangements that 
help the poor 
integrate themselves 
into sustainable 
savings and credit 
systems in order to 
increase capacity to 
invest, bear risk, and
preserve livelihoods.
 
FOCUS 
COUNTRIES 
• Bangladesh 
• Cameroon 
• China 
• Egypt 
• Ghana 
• Madagascar 
• Malawi 
• Nepal 
• Pakistan 
 
ABOUT THE 
AUTHOR 
Aliou  Diagne is 
formerly a visiting 
research fellow of 
the Food 
Consumption and 
Nutrition Division at 
IFPRI. 
POLICY BRIEF No. 12   •   JULY 2000 
Joint liability group lending is currently the lending 
technology of choice of microfinance institutions 
because of the success of the Grameen Bank, which 
is using the technology to successfully lend to 
millions of poor Bangladeshi women. It is widely 
believed that the incentives for peer-selection, peer-
monitoring, and peer pressure resulting from the 
joint liability clause are responsible for the high 
repayment rates of the Grameen Bank and other 
similar microfinance institutions. The analysis and 
findings presented in this brief are the results of 
research undertaken by the International Food 
Policy Research Institute (IFPRI) and Bunda Col-
lege of Agriculture on the practice and performance 
of joint liability group lending in Malawi. This 
research provides evidence on the extent to which 
peer selection, peer monitoring, and peer pressure 
are taking place in the credit groups affiliated to the 
Malawi Rural Finance Company (MRFC), the main 
microfinance institution in Malawi, and their impact 
on the joint liability on loan repayment.  
 The empirical findings of the study contrast with 
the conventional wisdom and assumptions regarding 
the informational advantage of the joint liability and 
its implications for incentives for peer selection, 
peer monitoring, peer pressure, and loan repayment. 
In particular, the findings do not support the widely 
held presumption that joint liability is responsible 
for the high repayment rates of the successful group 
lending programs. In fact, the study finds a negative 
impact of the joint liability clause on the repayment 
outcomes of MRFC credit groups. The main find-
ings and policy implications of the report are sum-
marized below. 
 1. The relative value that borrowers attach to 
access to future credit is found to be the most im-
portant factor that motivates them to repay their 
loans and that of defaulters in their groups. The 
average amount MRFC borrowers are willing to pay 
in order to maintain their access to credit is found to 
be 523 Malawi kwacha (about US$12) or 24 percent 
of the average loan size per member. This is more 
than the 15 percent up-front cash deposit that the 
MRFC seasonal agricultural group members are re-
quired to pay. Hence, the findings demonstrate that 
a lending policy of gradually increasing the loan 
sizes of good and repeat borrowers (which increases 
the value of maintaining future access to credit) will 
have a positive impact on repayment rates and that 
higher interest rates (which increase both the value 
of defaulting on a current loan and that of the 
defaulted loans that must be repaid by nondefaulters 
under the joint liability rule) will have a negative 
impact on repayment rates. 
 2. Peer selection is very limited in MRFC credit 
groups because of the significant influence that 
extension workers, credit assistants, and village 
authorities have on the formation and com-
position of MRFC credit groups. The study found 
that 90 percent of the groups include members from 
families of their respective village authorities. In 
terms of wealth, MRFC credit group members are 
also found to be, on average, the same or richer than 
the rest of the population in their respective villages. 
These findings imply that powerless ordinary village 
residents are in a situation where, often, their only 
choice is either joining the only credit group in the 
village in which they have very little or influence on 
its membership composition, or be without credit. 
 3. Not much effective peer monitoring is taking 
place in MRFC credit groups because of the non-
pecuniary “social cost” associated with it. For ex-
ample, the lack of effectiveness of the group moni-
toring committees has been attributed to the fact that 
committee members are usually fearful of being 
seen by  other members  as spying  on or  interfering  
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE 
2033 K STREET, NW, WASHINGTON, DC 20006-1002 USA 
Web: www.ifpri.org   •   Phone: 1-202-862-5600   •   Fax: 1-202-467-4439   •   Email: ifpri@cgiar.org 
Design and Sustainability Issues of Rural Credit and Savings 
Programs: Findings From Malawi 
ALIOU DIAGNE  
ABOUT IFPRI 
 
IFPRI’s mission is 
to identify and 
analyze strategies 
for meeting food 
needs of the 
developing world, 
with particular 
emphasis on low-
income countries 
and the poor. 
 
IFPRI is a member 
of the Consultative 
Group on 
International 
Agricultural 
Research (CGIAR). 
 
- - - - - - - - - - - - - - 
 
Any opinions 
expressed herein are 
those of the 
author(s) and do not 
necessarily reflect 
those of IFPRI. 
 
- - - - - - - - - - - - - - 
 
CONTACT 
Bonnie McClafferty 
Communications 
Specialist 
B.McClafferty@ 
   CGIAR.ORG  
 
with other members’ private businesses. Another 
explanation for the relatively limited peer monitor-
ing is provided by the fact that MRFC credit group 
members are usually from more than one village 
(three on average). But, even when an effective peer 
monitoring takes place, its effect on loan repayment 
is not as important as it is believed to be because the 
main reason for default in MRFC credit groups is 
unwillingness to repay and not inability to repay. 
Indeed, unwillingness to repay is found to be the 
first cause of default in MRFC credit groups (25 
percent of all defaults). Furthermore, the analysis of 
the reasons for default in MRFC credit groups 
shows that at most, 37 percent of the defaults in 
MRFC credit groups could have been possibly pre-
vented by a more effective peer monitoring. 
 4. The monitoring activities of extension 
workers are very important for the well function-
ing and performance of MRFC credit groups. 
Extension workers play an important role, for 
example, in ensuring that in-kind loan packages, 
consisting mostly of fertilizer and seed, are not 
resold by borrowers. In the case of tobacco farmers, 
they are also involved in ensuring that all group 
members send their harvested tobacco on time to the 
tobacco auction floors instead of selling them to 
intermediate buyers. This part of their monitoring 
work is very important for MRFC because of its 
arrangements with the auction floors that allow 
MRFC to deduct the amounts owed by tobacco 
groups directly from the proceeds of their tobacco 
sales. Monitoring activities are usually undertaken 
in conjunction with their extension work and ex-
tension workers have strong incentives to give 
special attention to the credit groups in their sections 
because of the way they are rewarded in their jobs. 
 5. Peer pressure takes place less frequently 
than implied by the joint liability, and when it 
does take place, it is more likely to fail than to 
succeed in inducing defaulters to repay their 
loans. The relatively few instances of use of peer 
pressure are explained by the nonnegligible “social 
costs” that nondefaulters incur when they peer pres-
sure defaulters. The evidence indicates that active 
peer pressure serves more as a credible mechanism 
for good borrowers to signal to future potential 
defaulters their willingness to apply peer pressure 
than a mechanism for recovering current defaulted 
loans. 
 6. Joint liability has negative impacts on the 
loan repayment of MRFC credit groups. The 
study found that MRFC groups that expected the 
joint liability not to be fully enforced performed 
much better in terms of repayment rates than groups 
in which the joint liability was expected to be fully 
enforced. The impact of the joint liability on en-
forcement is also found to worsen when some 
members have some doubt about the repayment 
intentions of other members in their groups—a 
situation that occurred in 62 percent of MRFC credit 
groups. Furthermore, the majority of the partially 
paid delinquent loans consist of good borrowers 
who are defaulting because of the joint-liability 
nature of contracts. 
 
 
 
 Based on the above findings, it is concluded that 
(1) the prominence given to the joint liability in 
explaining the high repayment rates does not hold 
up universally and (2) microfinance institutions 
targeted to poor people can operate successfully and 
achieve high loan recovery rates if they develop 
lending technologies that do not rely on collateral, 
but instead cultivate borrowers’ expectations for 
higher and continuous access to credit, and establish 
an effective screening and monitoring system using 
their field staff. Empirical findings also suggest that 
joint liability can have a negative impact on loan 
repayment. This calls for institutions such as the 
MRFC to reconsider its inflexible full group joint 
liability policy (no new loans to any borrower until 
all loans are repaid), an arrangement generally dis-
liked by the majority of its borrowers. It is recom-
mended that MRFC adopt a limited group joint lia-
bility policy in which defaulters are excluded from 
the groups and nondefaulters are issued new loans 
when they pay a reasonable monetary penalty not 
tied to the total amounts of the defaulted loans. This 
more flexible group joint liability policy has the 
potential to yield both lower delinquency rates while 
retaining most of the cost-saving advantages of 
lending through groups. Finally, it is important to 
note that the proposed limited joint liability policy is 
different from a simple relaxation of the full joint 
liability in that it does not penalize nondefaulters in 
defaulting groups. Such simple relaxation—which 
usually takes the form of a policy of issuing new 
loans to nondefaulters in groups with repayment 
rates above some threshold value—has been experi-
mented with in Malawi under the SACA program 
during the late 1980s and early 1990s with poor 
results.￿ 
 
 
 
Diagne, A., W. Chimombo, F. Simtowe, and C. 
Mataya. 2000. Design and sustainability issues 
of rural credit and savings programs for the 
poor in Malawi: An action-oriented research 
project. International Food Policy Research 
Institute, Washington, D.C. 
 
 
 
 
Selected Reference 
Conclusions 

Design and sustainability issues of rural credit and savings programs

http://www.ifpri.org/sites/default/files/publications/mp05_brief12.pdf

Design and sustainability issues of rural credit and savings programs

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