Likelihood Of Repayment Research Articles

Group Lending with Peer Selection and Moral Hazard

The theory on group lending suggests that joint liability induces borrowers to form homogeneous groups based on their risk types, which alleviates adverse selection and contributes to the success of microcredit schemes. We extend this theory by allowing individuals to differ both in their exogenous risk type and in their endogenous effort level. We find that joint liability leads to positive assortative matching in both a non-cooperative and cooperative game setting. Groups of safe borrowers additionally exhibit higher effort levels, which reinforces their likelihood of repayment as opposed to risky groups.

Impact of Asymmetric Information in Islamic Financial contract: An Empirical Analysis

A primary source of asymmetric information arises from banks’ uncertainty about borrowers’Creditworthiness. This can generate two types of barriers to efficient credit allocation in the loan market: ad-verse selection in the likelihood of repayment and moral hazard in the riskiness of firms’ business decisions, also affecting repayment. This study investigated the consequences of asymmetric information on Islamic financial contracts in the Pakistani market for small and medium enterprise (SME) business lines of credit. Islamic bank’s main financial contracts were discuss the two of them which are Istisna and Murabah .The methods of’ T test’ was conducted to ascertain the difference in means of both forms of financing, whereas Multiple Regression Analysis using panel data to assess the relationship of critical variables with Disbursed amount, profit rate, spread, tenor. Data of three year i.e. from 2016 to2018 of 35 firms, with 105 number of observations having istisna and murabah contract, were taken. The results suggested that both the means of murabah and istisna financing are significantly different in major performance indicators, implicating companies that have taken these two financing have performed differently. Secondly, in most of the ratio that mattered like efficiency and profitability, murabah based financing have yielded more efficient results and better performed as compared to istisna.

Impact of Asymmetric Information in Islamic Financial contract: An Empirical Analysis

A primary source of asymmetric information arises from banks’ uncertainty about borrowers’ Creditworthiness. This can generate two types of barriers to efficient credit allocation in the loan market: ad-verse selection in the likelihood of repayment and moral hazard in the riskiness of firms’ business decisions, also affecting repayment. This study investigated the consequences of asymmetric information on Islamic financial contracts in the Pakistani market for small and medium enterprise (SME) business lines of credit. Islamic bank’s main financial contracts were discuss the two of them which are Istisna and Murabah .The methods of’ T test’ was conducted to ascertain the difference in means of both forms of financing, whereas Multiple Regression Analysis using panel data to assess the relationship of critical variables with Disbursed amount, profit rate, spread, tenor. Data of three year i.e. from 2016 to2018 of 35 firms, with 105 number of observations having istisna and murabah contract, were taken. The results suggested that both the means of murabah and istisna financing are significantly different in major performance indicators, implicating companies that have taken these two financing have performed differently. Secondly, in most of the ratio that mattered like efficiency and profitability, murabah based financing have yielded more efficient results and better performed as compared to istisna.

Group Lending with Peer Selection and Moral Hazard

This paper extends Ghatak (1999)'s base model of group lending with asymmetric information by allowing individuals to differ both in their exogenous risk type and in their endogenous effort level. We find that joint liability leads to positive assortative matching in both a non-cooperative and a cooperative game setting. Groups of safe borrowers also exhibit higher effort levels, which further reinforces their likelihood of repayment as opposed to risky groups.

Small-Dollar Installment Loans: An Empirical Analysis

Small-dollar credit is a form of unsecured consumer credit primarily characterized by the low dollar amounts of loans. There has been increasing debate about the benefit and harm to consumers from small-dollar loans, along with recent discussion of greater regulation. Determining the need for and appropriate form of regulation requires an understanding of the current state of the small-dollar credit industry based on actual industry data. One significant change is the shift from single-payment payday loans to multiple-payment loans or installment loans. This paper is the first systematic study of small-dollar installment loans.Our main findings are as follows. A typical installment loan is for $900 and is scheduled to be repaid in 12 biweekly installments over six months. Less than a quarter of borrowers take another loan within 14 days of ending a previous loan. Most borrowers do not keep their loan until maturity. Even repeat borrowers generally either pay off the loan or have it charged off before the maturity date of their original loan. Those who borrow repeatedly are more likely to repay their loans on average and are offered lower interest rates, indicating that at least some of these repeat borrowers are utilizing the opportunity to borrow again based on their past track record of payments. Payment-to-income ratio alone is a poor metric for predicting whether the loan will be paid off or not. Regulation imposing an upper limit on payment-to-income ratio is likely to result in reduced access to credit for a large majority of current borrowers, without a large improvement in loan payoff rates. A payment-to-income limit of 5% would reduce the volume of credit between 55.1% and 92.6%. It would only increase the loan payoff rate by 0.7% (from 72.9% to 73.6%). A payment-to-income limit of 10% will result in reduction of credit between 26.5% and 67.8% without any increase in loan payoff rate.A regulation that prohibits lending based on simple affordability criteria risks substantial reductions in credit availability to a population that often has few available alternatives. A cost-benefit analysis of the proposed regulation requires weighing the cost of reduced access to a financially underserved segment of the population against the benefit of a higher loan payoff rate and lower incidence of indebtedness. Limiting the payment-to-income ratio to 5% would benefit fewer than 1% of borrowers by reducing the incidence of loans that are not paid off, but it would impose costs on 86% of current borrowers, who could not be offered the same credit on the same terms that they now obtain. Raising the permitted ratio can reduce these costs, but it also reduces the benefits, because payment-to-income ratio alone is poor predictor of the likelihood of repayment.

Individual Preferences Over NGO Projects: Evidence from Microlending on Kiva

Peer to peer (P2P) microfinance connects philanthropic citizens with poor entrepreneurs in the developing world. Although its popularity has grown exponentially with the creation of several competing online platforms, very little is known about how individual lenders behave and whether their priorities differ from those of traditional development practitioners. This paper presents evidence on how individual lenders choose between borrowers, and how lenders' preferences relate to the objectives of the microfinance sector. Using data from Kiva.org, we present estimates of the impact of publicly visible project characteristics on funding speed. Results suggest that Kiva lenders rationally consider indicators of the likelihood of repayment as well as borrowers' need. Smaller loans, groups and women get funded faster as do loans to sectors of activity with low entry costs. Meanwhile, loans requested to finance education and health projects or those advertised by NGOs with better risk ratings, and lower default and delinquency rates, fund faster. The results imply that policy makers and practitioners who seek to use microfinance as a poverty alleviation tool should invest in the P2P approach.

Conditionality covenants: Commitment versus discretion in sovereign credit contracts

AbstractThis paper investigates the impact of imposing conditionality covenants on the performance of the signatories to a sovereign credit contract. A two period model is developed in which creditors provide a loan to a sovereign conditional upon the implementation of investments. Commitment to these covenants overcome the debt repudiation problem, as it increases the likelihood of repayment, if the implemented conditionalities contribute to an increase in the sovereign's productive capacity. A three period model is also developed to entertain the possibility that the sovereign engage in credit activities in subsequent periods, where in the final period the debtor has obligations towards junior and senior creditors. This allows for dynamic inconsistency, as the sovereign may be tempted to increase its debt in the second period, thus increasing the probability of repudiation in the third period. Imposing conditionality covenants by senior creditors that increase the portion they can appropriate in case of repudiation, relative to junior creditors, reduces the supply of credit by junior creditors in the second period and thus overcomes the debt dilution problem. Copyright © 2009 John Wiley & Sons, Ltd.

Sovereign Debt Restructuring and Bank Capital

The focus of this paper is on the interaction between a bail-out loan decision of a bank to a sovereign borrower and the adequacy of the bank's capital. The new loan is granted on two conditions: First, it must improve the likelihood of repayment of the outstanding loan; second the bank should have adequate capital.We find that in general a positive relationship exists between capital and the bail out loan and between existing debt and the new loan. However, under certain circumstances a negative relationship exists between the bank's capital and the new loan. Empirical results support the main implications of the theoretical model.

Peer Monitoring and Credit Markets

A major problem for institutional lenders is ensuring that borrowers exercise prudence in the use of the funds so that the likelihood of repayment is enhanced. One partial solution is peer monitoring: having neighbors who are in a good position to monitor the borrower be required to pay a penalty if the borrower goes bankrupt. Peer monitoring is largely responsible for the successful financial performance of the Grameen Bank of Bangladesh and of similar group lending programs elsewhere. But peer monitoring has a cost. It transfers risk from the bank, which is in a better position to bear risk, to the cosigner. In a simple model of peer monitoring in a competitive credit market, this article demonstrates that the transfer of risk leads to an improvement in borrowers' welfare.