| This research examines the factors influencing default decisions in group-lending based microfinance loans. The model of borrower default contributes to the understanding of rural finance by connecting the literature on household bargaining power with models of credit contracts. Specifically, the likelihood of default is a function of four main variables: business income, other family income, group sanctions, and intra-household bargaining power.; A borrower-level survey of microfinance households in the Philippines collected in 2000 is used to test the implications of the loan default model. The survey shows that there are significant differences in the incidence of default in small loan sizes as compared to larger loan sizes. Default behavior changes over time and depends on the loan size. In general, borrowers will repay the first loan whenever possible, but incentives to repay diminish as loan size increases. This is a function of the sharply diminishing returns to capital in the microfinance businesses.; The empirical tests of the survey data show that, for small loan sizes, the theoretical model is a good predictor of default behavior. Both microfinance business income and other family income are positively and significantly related to loan repayment. Also, as the relative household bargaining power of the borrower increases, the loan is more likely to be repaid.; However, prediction of default behavior in large loan sizes is more problematic. The income from the microfinance business is still a significant determinant of repayment, but other family income is no longer significant. Also, variables measuring intra-household bargaining power are no longer significant predictors of repayment. Finally, the survey shows that the group sanctions are weak and have at best a small impact on the default decision. |
