This article reviews recent literature on joint liability lending in micro-credit markets characterized by adverse selection. This mode of lending consists of granting individual loans to wealthless borrowers provided that they form groups. If a group does not fully repay its obligations, then the microlender cuts off all members from future credit until the debt is repaid. Joint liability lending is able to extract information through a peer selection mechanism, with the effect of raising both repayment rates and welfare with respect to individual lending.

The term microcredit denotes the activity of financial organizations that employ nonconventional methods to lend to the poor.The pioneering microfinancial institution was Grameen Bank, founded in 1976 by Muhammad Yunus located in Bangladesh. The idea of microcredit has now spread globally, with replications in Africa, Latin America, Asia, and Eastern Europe, as well as in richer economies like Norway, the United States, France and England. Empirical evidence shows that these unconventional lenders have a reasonable degree of financial self-sufficiency and repayment rates even if they target poor people whom no ordinary commercial bank would want as customers because of their lack of assets to be put up as collateral. One of the reasons for this success, especially in the rural underdeveloped economies, is the application of joint liability. This scheme of lending captured the interest of researchers since it mitigates informational problems in credit markets without requesting any pecuniary collateral.

The current survey focuses on joint liability as an instrument to improve discrimination among borrowers of different types and is based on Ghatak (1999), Morduch (1999), Ghatak and Guinnane (1999), Ghatak (2000), Gangopadhyay and Lensink (2001) and Gangopadhyay et al. (2001). Joint liability lending works as follows: Borrowers, who work on independent projects, self-select into groups to get the loan. If the group does not fully repay its obligations, then the microlender cuts off all the members from future credit until the debt is repaid. Joint liability induces borrowers, who have perfect information about the type of each other for they belong to small rural communities, to choose partners of the same type: This is called peer selection.

Joint Liability Lending in Microcredit Markets with Adverse Selection: A Survey, individual loans, pioneering microfinancial institution, financial agreement specifies, joint liability payments, commercial bank, informational problems, credit markets, small rural communities, microcredit market.