Abu Zafar M. Shahriar

ABSTRACT We use primary data from Bangladesh to examine whether the strength of bank-borrower relationships affects the process of transition from joint liability to individual liability loans in the microcredit sector. Using instrumental variables in survival analysis, we show that borrowers who maintain a non-mandatory savings account with the microfinance institution (MFI), and those who borrow from a single MFI, graduate from joint liability to individual liability loans with relatively short repayment records. The results are robust across a range of non-parametric and parametric specifications. Our findings imply that MFIs have incentives to invest in relationship development with their clients in order to expedite the process of transition from joint liability to individual liability loans, which in turn, can reduce the incidence of voluntary drop outs by the matured borrowers.