Micro-finance crises: effects of economic and psychological threats on group processes

Abstract

We report the findings of an experiment conducted around MFI group processes to parse the question of potential default by members, often the tipping point of crises. Micro-finance group processes entail economic and psychological costs to members. We defined these costs in terms of a given financial loss and reputation loss, perceived by members as economic and psychological threats. Participants responded to the measures of joint liability, fear of reprisal and peer pressure. The results show that members are able to make the subtle distinction between different types of peer pressure and joint liability. We also show that psychological threats perceived by borrowers are key to understanding MFI group processes, especially as triggers to a repayment crisis.