Process Views of Peer Mechanism in Joint Group Lending through the Theoretical Lens of Agency Theory: A Systematic Review of Literature

Abstract

Formal institutions are unwilling to lend to the micro poor due to information asymmetry and lack of physical collateral, (Rai & Sjöström, 2010), (Angelucci, Karlan et al., 2015). However, group lending helps to address this problem by leveraging social capital, (Harriss & de Renzio, 1997). The goal of this study is to see how Peer Monitoring, Selection and Enforcement might help formal financial institutions to overcome Moral Hazard and Adverse Selection issues that come with working with disadvantaged borrowers in an agency relationship. The systematic literature review method was used to conduct the analysis. This study examines the growth of literature in the field of joint liability via the theoretical lens of agency theory, as well as a process view of literature in the field of Peer monitoring, selection and enforcement. According to the study, adverse selection in a Joint Liability Group is mitigated by Peer Selection which is motivated by social ties and borrower risk type and moral hazard is mitigated by Peer monitoring and enforcement. In a group, Peer mechanism is a major factor that mitigates agency problems and default in repayment of loans, (Noglo & Androuais, 2015). There is scope for further research in the domain of impact of risk diversification and random matching on the sustainability of Joint Liability Group.