Question

What kind of asymmetric information is addressed by joint liability in microfinance, and how does it work?

Answer 1

Imperfect information forces will save the individuals to cross subsidies risky borrowers and it will lead to credit rationing. If there is perfect information the lenders can discriminate he prices among two types of borrowers; higher interest rate for risky individuals and lower interest rate for safe borrowers. Banks face the asymmetric information in case of the borrowers. This will lead to sanction of loans for all borrowers at same nominal interest rate. This will inure same cost of capital for both of the borrowers.
Joint liability is a closed network with strong social capital. This borrowing groups posses the valuable information which helps the screening process with adverse selection and monitoring actions will curtail the moral hazard. Asymmetry within this micro finance group will leads to the reduction of confidence of the borrowers. Imposing same interest rate for the all the borrowers will reduce the profit level and leads to important problem like moral hazard and adverse selection.