Risk-Matching in Credit Groups: Evidence from Guatemala

Abstract

With widely publicized high repayment rates, microfinance is gaining a great deal of attention. Using data from Guatemala, this paper examines risk matching in credit groups. The literature often assumes that joint-liability will lead groups to form homogeneously in risk, and that risk heterogeneity emerges only as a second-best. We find they do not, even accounting for matching frictions. Data on mutual-help within groups provides evidence consistent with the hypothesis that group lending provides insurance among borrowers. This intra-group insurance suggests that current credit contracts can be improved by incorporating insurance provisions. We discuss one possibility of such a contract briefly.