Commercialization in Microfinance: Exploring the Consequences of Changing Loan Structures from Joint to Individual Liability

Abstract

Commercialization has changed several parts of the world throughout recent history. It creates competition and markets that guide the innovation and success of business models. In microfinance, commercialization has led to shifts in the operational models of microfinance institutions, especially in the transition from joint liability to individual liability lending. It is driven by the growing focus on profitability and efficiency as MFIs compete in an increasingly commercialized environment. This literature review explores issues regarding the changes in interest rates, burrower welfare, and microfinance market structure. The research objective is first to discuss the underlying theory in competition and its possible impacts on using different lending types. Second, it will examine the effects of the changes that this competition-led lending type transformation can have on microfinance. The literature review highlights that the movement towards individual liability lending can undermine the very idea of microfinancing by introducing risks that challenge the foundational principles on which microfinance was built on.