From Group Lending to Lending by A Group
By Christophe Villa and Nurmukhammad Yusupov
Theoretical literature on microlending has focused on the case of a single monopolistic MFI despite extensive evidence that multiple banking relationships are widespread among small businesses. Indeed, in France and many other countries, microcredit is being offered in syndication by the local governmental agencies, commercial banks and specialized microfinance institutions at the same time.
This paper develops a theoretical model of microcredit with multiple financial institutions to offer an explanation for the complexity of modern microcredit services. The paper argues that syndication of capital by a specialized MFI, such as France Innitiative (http://www.france-initiative.fr) which offers microfinancing bundled with screening and monitoring tasks, and a traditional financial institution offering capital constitutes Pareto improvement for all participants as opposed to the classical case of a single MFI. The key to the superiority of multiple lender setting is the heterogeneity of the types of financial institutions. A specialized MFI has informational advantage in offering microcredit over non-specialized financial institutions. By teaming up with a non-specialized bank the MFI is able to ease its budget constraints. By taking on junior debt, the MFI is able to increase the interest rate earned on microcredit by lending to the same types of borrowers that it would lend to operating on its own. From the bank's standpoint, by teaming up with the MFI it is able to efficiently outsource monitoring tasks.
Although the discussion in the paper is around financing institutions the idea of the paper applies to a wider variety of institutions. In reality participation in microcredit goes beyond simple provision of capital. For example, there are institutions that participate by providing their expertise, e.g. Micromentor (www.micromentor.org) in the US, or loan guarantees and screening, e.g. France Active (http://www.franceactive.org).
In a broader perspective of economics, the paper is related to the literature on multiple lender financing. It can also be viewed from the standpoint of the literature on cross sector partnership.
