The Game Club

What makes microfinance in developing countries possible?

It is quite amazing how it is now possible for a poor unemployed person with no assets or collateral whatsoever to receive a microloan from a bank. What makes this possible?

- The stronger the social connections between members of a group lending arrangement, the higher is its repayment performance.

- Repayment performance is also associated with the extent to which group members have developed personal trust. This supports the view that social connections and personal trust are important in assisting monitoring and enforcement efforts.

What is “Group Lending”?

Group lending refers to the practice of working with clients in small groups (typically comprised of three to seven neighbors). Loans are made to individuals, but the group as a whole is held jointly liable should repayment difficulties arise. Economic theorists have been particularly interested in group lending, and nearly all of the economic work on microfinance focuses on the incentives induced by joint liability in group lending contracts, building on lending models pioneered by microfinance leaders like Bangladesh’s Grameen Bank and Bolivia’s BancoSol. (Beatriz Armendáriz de Aghion & Jonathan Morduch)

In other words, consider this hypothetical scenario: A bank makes a microloan to every resident of a small village in a developing country. It then becomes the responsibility of each resident of the village to ensure that every other person makes their loan repayments on time. If one loan recipient defaults, all other loan recipients will be liable. Each member of the group is accountable to all the other members, even though their business interests are independent.

Microloan recipients are all entrepreneurs. It is a universal reality that entrepreneurship is a rollercoaster ride. When these entrepreneurs are stuck in a pit, they can rest assured that their neighbours will come dig them out.

Entrepreneurs and startups in the western world would typically argue that society is not geared to support them. A few entrepreneurs persevere and breakthrough every hurdle to become successful. However, most get stuck in a pit and never get out.

What would happen if startups/entrepreneurs formed their own “Game Clubs” and took on a pact to be accountable and responsible for all other members of their club?