Djamshid ASSADI

Featuring loans with social collateralsThe role of Reference Trust (Lending) Groups

Burgundy School of BusinessThe 3rd International Conference on Institutional and

Technological Environment for Microfinance

Delhi - ITEM 3 - January 5th 2012

The ITEM3January 5 – 8, 2012

Djamshid ASSADI

AGENDA

1) Context: The unbanked and social collateral

2) Research Inquiry, objective and method

3) Review of literature on social conformity

4) Cases studies of group lending

5) Conclusion and Further Research

Djamshid ASSADI

AGENDA

1) Context: The unbanked and social collateral

2) Research Inquiry, objective and method

3) Review of literature on social conformity

4) Cases studies of group lending

5) Conclusion and Further Research

Djamshid ASSADI

Regional Access to Microfinance

4

State of the Microcredit Summit Campaign Report 2011

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The World’s Unbanked% OF THE TOTAL ADULT POPULATION WHO DO NOT USE FORMAL OR SEMI-FORMAL

FINANCIAL SERVICES

Region Total Adults (million) % of unbanked

Higher-income OECD countries 60 8%

Latin America 65 65%

Central Asia & Eastern Europe 193 43%

East Asia, Southeast Asia 876 59%

Southern Asia 612 58%

Middle East 136 67%

Sub-Saharan Africa 326 80%

Total 2455 53%

Source: Chaia A., Goland T., Schiff R. (2010), “Half the World is Unbanked, McKinsey Quarterly. Retrieved from sso.mckinsey.com/unbanked

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Context: Exclusion From Banking System

Reasons of Un-banking

Developed countries Developing countries

Supply-side

Accessibility (Caskey 1997 ; Caskey 2002; Anderson 2006); High costs of services (Caskey 2002); Discriminatory targeting (FSA 2000, Carbo et al. 2007, Kempson et al. 1999, Caskey 2002); Distance (Caskey 1997, Caskey 2002, Kempson et al. 1999);

Accessibility (McKinsey 2010a, De Sousa 2010, Lyons et al. 2004); High costs of services (McKinsey 2010a, De Sousa 2010, Lyons et al. 2004); Discriminatory targeting (McKinsey 2010a, De Sousa 2010, Lyons et al. 2010); Distance (McKinsey 2010a, 2010b, De Sousa 2010, Lyons et al. 2004);

Demand-side

Income level (Caskey 1997 ; Caskey 2002; Anderson 2006); Bank phobia (Caskey 1997 ; Caskey 2002; Anderson 2006); Auto-exclusion (Caskey, 2002); Non-adapted services (Kempson et al. 1999);

Income level (Finscope 2006, Djankov et al. 2008, Lyons et al. 2004); Bank phobia (McKinsley Quarterly 2010a et 2010b, Finscope 2006, De Sousa 2010, Djankov et al. 2008); Auto-exclusion (Djankov et al, 2008); Non-adapted services (McKinsey 2010b, De Sousa 2010, Lyons et al. 2004);

Djamshid ASSADI

Reasons of the high number of the unbanked

IT - Mobile telephony Social collateral

Costs of small transactions

Absence of financial collateral

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Solution of Social Collateral

Conventional collateralAssetsIncomeDebts

Repayment HistoryGuarantee

Social collateralGroup guaranteeFrequent visits

Risk of public shamePeer monitoring

Promise of future credit

Source: Ledgerwood (1998), Microfinance Handbook

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What Is Social Collateral?

The guarantee is relying on direct recommendations of

group members, prior to lending; if one member defaults,

other group members have to pay for him/her.

The threat of the whole group not getting a loan was

enough to instigate people to pay or for others in the

group to pay for her.

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A Story!!!You go to a restaurant and order a $30 filet mignon. When

your food arrives you take a bite and realize the restaurant

has defrauded and served you a $10 flank steak instead.

Do you take the owner to court?

Probably not, because time cost is not worth it even if

you win.

Certainly not, because if they do customers will stop

eating at their restaurants and tell all others about the

disappointing experience.

Knowing this, do restaurant owners perpetually

defraud?

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How Social Collateral Reduces the Moral Hazard?

Finding the appropriate

solutions

Availability to monitor and

solve problems

Trustworthiness for more

loans

Conscious monitoring of commitments

Better detecting the possibility of

failure

Supporting peers in case of financial difficulties

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Paradox of Online Group Impact Explained!

Usefulness of

credit scoring has been confirme

d repeatedl

y

Belonging to online groups

increases both the

chances of getting a loan, and

that of reimbursin

g

The reasons

are though neither uncovered nor

explained!Fischer E, Bristor J., and Gainer B., "Creating or Escaping Community? An Exploratory

Study of Internet Consumers' Behaviors," in Advances in Consumer Research 23 (Provo, UT: Association of Consumer Research, 1996), 178-182

Iyer R., Khwaja A. I., Luttmer, E. F. P., Shue, K. (2009), Screening in New Credit Markets: Can Individual Lenders Infer Borrower Creditworthiness in Peer-to-Peer Lending?, NBER Working Paper No. 15242, Retrieved at: http://www.nber.org/papers/w15242

Djamshid ASSADI

AGENDA

1) Context: The unbanked and social collateral

2) Research Inquiry, objective and method

3) Review of literature on social conformity

4) Cases studies of group lending

5) Conclusion and Further Research

Djamshid ASSADI Djamchid ASSADI

Initial Inquiry

Can the dynamism of ex ante conventional

groups as social collateral be similarly

reproduced in ex post online groups?

Djamshid ASSADI

Ex-ante and Ex-post Affiliations

Ex-AntePrecedes an individual’s birth

Ascribed groups

Shared cultural codes and common rules

Ex-PostResults from voluntary action and claim

Acquired groups

Contacts and agreed rules

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Can Social Collateral Be Formed Online?

Djamshid ASSADI

AGENDA

1) Context: The unbanked and social collateral

2) Research Inquiry, objective and method

3) Review of literature on social conformity

4) Cases studies of group lending

5) Conclusion and Further Research

Djamshid ASSADI 18

Methods of Research

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Examples of Exploratory Meta-analysis

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Sociological reasons of Compliance

The influencing agent should have the ability to

reward or punish for (non)compliance;

monitor the compliance or failure to

comply.

Group members conform more when working

for a common goal rather than individual goals,

deviance will be punished more severely.

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Economic Anlysis of Collective Action

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Economic Reasons of Compliance

Observable actions

Articulated punishment strategies (fines or

trade sanctions, exclusion)

Small size of groups

Economics of Free RidesIn progress

Djamshid ASSADI

AGENDA

1) Context: The unbanked and social collateral

2) Research Inquiry, objective and method

3) Review of literature on social conformity

4) Cases studies of group lending

5) Conclusion and Further Research

Djamshid ASSADI 24

Example of Research Methodof Cases Studies

Amit, R. and C. Zott. "Value Drivers of e-Commerce

Business Models." Creating Value. Hitt, Michael A.

Blackwell Publishing, 2002. Blackwell Reference Online. 09

June 2009. Retreived on: http://www.blackwellreference.com/subscriber/tocnode?id=g9780631235118_chunk_g97806312351184

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Experiences of Social Lendingin Different Cultures

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Cases Studies Analysisin progress

Groups … Members …

Exist both in rural and urban areas

Are usually unbanked

Based on defined conditions : contribution, life time, frequency of meetings and repayments

Always know well each others

Rely on oral agreements Use the borrowed money both for professional and consumption

Have a list of the members to know who is engaged in and dues money to others

Is always managed by an organizer

Djamshid ASSADI

AGENDA

1) Context: The unbanked and social collateral

2) Research Inquiry, objective and method

3) Review of literature on social conformity

4) Cases studies of group lending

5) Conclusion and Further Research

Djamshid ASSADI 28

Can the dynamism of ex ante conventional groups as social collateral be similarly

reproduced in ex post online groups? (I)

YES NON

Influencing agent can monitor the compliance or failure to comply

Actions are observable

Influencing agent can reward the compliance

Influencing agent can punish the non compliance;

Groups are of small size

Group members conform more because they have a common goal

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Can the dynamism of ex ante conventional groups as social collateral be similarly

reproduced in ex post online groups? (II)

YES NON

Groups can exist anywhere

Conditions can be defined

Agreements can be oral

Members can be listed

Groups ban be controlled by managers

Members always know each other

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Future Research Directions

Djamshid ASSADI

ANY QUESTIONS?