Epsilon Archive for Student Projects

Abstract

Apart from poverty alleviation which is the prominent mission of microfinance institutions (MFIs), MFIs also need to maintain their financial sustainability to assure that they will have working capital in the next period. "Repayment rate" is a common indicator used to measure financial sustainability of MFIs. The aim of this study is to investigate the significant factors affecting the level of repayment rates, using the Chanthaburi Province Savings Group (CPSG), a best practice MFI with a high repayment rate in Thailand (www, Prachathai, 2011), as the case study. Data used in this study is from three sources: the CPSG’s documents, an interview, and observation.

The results of this study find that a 100 percent repayment rate of the CPSG arises out of two underlying factors: jointly liable group-lending contract and strong incentives. Employing jointly liable group-lending contracts will help the CPSG mitigate voluntary default or the strategic default problem and then lead to high repayment rate achievement. For strong incentives, the CPSG’s regulations have been designed to generate strong incentives inducing the borrowing member to repay the loan voluntarily, for example, a delinquent borrower will be deprived of the borrowing right for one year, and a default borrower who are dismissed from the membership will be excluded from the CPSG’ welfare services.

However, it is worth noting that in employing the group-lending scheme the CPSG shifts the burden of default risk to the members who are in a worse position to bear default risk than the lender (Stiglitz, 1990). Moreover, in this study the group-lending scheme employed by the CPSG has mitigated only the strategic default problem by neglecting adverse selection and moral hazard problems. By doing so, the CPSG may have to face involuntary default (adverse selection and moral hazard problems) in the future, and the borrowing member whose investment fails may be deteriorated by this lending scheme as well.