Quarterly Journal of International Agriculture No. 1/07
Long-run determinants of moral hazard in microfinance: a study of group lending programs from Malawi using panel data
Franklin Simtowe
University of Malawi, Lilongwe
Manfred Zeller
University of Hohenheim, Germany
Alexander Phiri
University of Malawi, Lilongwe
John Mburu
University of Bonn, Germany
Abstract
This paper investigates the determinants of moral hazard from a panel
data where the individual time series have unequal length (unbalanced
panel data). The estimation is done using the XTPROBIT procedure in
STATA. The data used is group level panel data from 99 farm and
non-farm credit groups of the Malawi Rural Finance Company in Malawi.
Results reveal that, contrary to theory, peer selection and peer
pressure are not important in mitigating moral hazard in the long run.
Results further indicate that, in the long run, social ties, peer
monitoring as well as the number of loan cycles have a significant
effect on the likelihood of incidence of moral hazard among
borrowers.
The implications from these findings are that while focusing on peer
monitoring, and social ties, MRFC cannot rely on peer selection and
pressure to reduce the incidence of moral hazard. Instead, MRFC has to
continuously appraise financial services needs for borrowers to meet
their changing and growing demand as they repeatedly borrow.
Keywords: moral hazard, joint liability, peer monitoring, peer pressure, Malawi
JEL: Q 14, C 2, H 82
Vol. 46 (2007), No. 1: 69-84