Microcredit contracts, risk diversification and loan take-up

By Ralph De Haas

There has been intense debate on whether microcredit can lift people out of poverty. One reason behind the limited poverty impacts that have been observed in many countries, is that relatively few people take up microcredit when it is offered to them. Using data from Mongolia, we look at the role of liability structure as a determinant of loan take-up. We find that in high-risk environments – which are prevalent in many emerging and developing countries – individuals take up joint-liability rather than individual-liability loans because joint-liability loans can help them share risk. While the continuing trend in the microfinance industry towards liability individualisation may benefit less risk-averse (wealthy) borrowers, it may also gradually exclude poorer and more risk-averse borrowers from the market for financial services.