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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
Djamshid ASSADI
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.
Djamshid ASSADI 10
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?
Djamshid ASSADI
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
Djamshid ASSADI 12
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
Djamshid ASSADI © 20
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.
Djamshid ASSADI © 21
Economic Anlysis of Collective Action
Djamshid ASSADI
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
Djamshid ASSADI 29
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
Djamshid ASSADI © 30
Future Research Directions
Djamshid ASSADI
ANY QUESTIONS?
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