Credit risk management and rules: The experience of group -based microcredit programs in the United States
Access to credit is a persistent problem in low-income communities across the US. Various public policy initiatives have been taken to deal with this issue. Recently, collaborative efforts of the public, private, and nonprofit sectors have resulted in micro-credit programs that serve very small businesses called microenterprises.
This dissertation focuses on peer group lending programs in the United States, a type of micro-credit institutions that used a group mechanism to facilitate the administration of loan transactions. This type of group-based micro-lending institutions is borrowed from similar experiences in less developed countries. This study provides a framework to discuss the credit risk management potentials of various credit institutions in dealing with the intertemporal information problems in a loan transaction. The varieties of rules adopted in peer group lending programs are categorized as boundary rules, information rules, authority rules, and payoff rules. The screening, monitoring, and enforcement activities undertaken by the program staff and clients are analyzed in relation to the incentives and opportunities embedded in these rules and the relevant contexts. Then, the dissertation discusses the effectiveness of the programs in maintaining low delinquent and default rates in relation to the pattern of screening, monitoring, and enforcement activities, as well as to the relevant contexts.
Data for the study is drawn from surveys of the staff and participants of about 25 peer group lending programs in the US. The full data set has responses from about 50 staff members and 200 program participants in about 50 peer groups. The findings in this dissertation suggest that the intended group level interactions take place as active group screening, monitoring, and loan enforcement activities in response to program rules, especially the empowerment rules that assign authority and access to information. The resulting accumulation of social capital among peer group members cannot be denied. The program staff also plays prominent roles in the operation of these programs. The effectiveness of the staff and peer group actions to enhance loan performance is, however, not as obvious.