Recent Advances in Lending to the Poor with Asymmetric Information

Microfinance institutions have successfully extended unsecured small loans to poor and opaque borrowers at the bottom of the economic pyramid. This success is largely due to innovative financial contracts that impose joint liability and create dynamic incentives to mitigate the effects of asymmetric information. Given recent advances in microfinance contracts, there is a need to map the theoretical developments. This article aims to accomplish that by performing a critical literature survey of microlending contracts, focussing on joint liability and dynamic incentives, bringing out some of the deficiencies of contract-theoretic propositions that cannot effectively account for the social mission of microfinance.