Microfinance in rural and urban Thailand: Policies, social ties and successful performance

It has been well documented in the theoretical economic literature that joint liability group-based lending helps to overcome the hurdles of adverse selection, moral hazard, auditing cost and enforcement by exploiting local information embodied in specific social networks. Much less attention has been given to explain how other features of microcredit contracts have opened up possibilities for microfinance. In this paper I study a joint liability lending program in rural and urban communities in Thailand to analyze how social ties and policies, such as compulsory savings and training, contribute to explain the success of the program in terms of repayment rates. I use a novel panel dataset on household loans constructed from household, institutional and community-level data from the Townsend Thai Data Collection. Empirical results are consistent with the repayment predictions of existing theories on joint liability lending. The findings suggest that the degree of joint liability, understood as the degree to which borrowers are jointly liable for each other's loans, is negatively associated with repayment in rural and urban communities; and that, for a given degree of joint liability, joint liability lending programs are more likely to prosper in communities that have stronger social ties as these enable individuals to enforce agreements and impose social sanctions in case of default. In addition, the evidence suggests that households in rural areas have some knowledge about the customs and characteristics of people and institutions in the region which varies across communities and predicts success and failure of the microfinance program. Further, the estimation results indicate that practices such as requiring compulsory savings and providing training to borrowers are positive predictors of repayment in both rural and urban environments. The findings are robust to a number of specification checks.