The Effect of Screening Peer Monitoring, Group Pressure and Social Ties On Microfinance Borrowing Groups’ Repayment Behavior

Abstract

In this paper, we have conducted a survey of 225 urban borrowing groups at Akhuwat (interest free microfinance bank) in Lahore, Pakistan. We have looked at the effects of screening, monitoring, group pressure and social ties on borrowing groups’ repayment behavior. Our dependent variable delinquency looks at the number of days delayed from each due date, it is a count variable and thus requires count data model with clustered standard errors. We have used control function approach to compute first stage results as average loan amount is endogenous. However, endogenity of average loan amount was not supported by results. Thus, we treated it as exogenous in all our specifications and while computing Incidence Rate Ratio. From the paper, we have found out that monitoring reduces delinquency while social ties, screening, peer monitoring and group pressure have no significant impact on delinquency. While female are less delinquent than males. Moreover, when we include social ties interaction with female groups, we find out that social ties increase delinquency. While after including the interaction for group pressure and female groups, delinquency rates are reduced.