Abstract
The first part of this article describes joint liability lending in rural microcredit markets, where borrowers know each other and there is social pressure to repay debts. This mode of lending consists of granting individual loans to wealthless borrowers, provided that they self-select into groups: if a group does not fully repay its obligations, the microlender cuts off all members from future credit until the debt is repaid. Joint liability lending is shown to be able to raise repayment rates compared to traditional individual lending. The second part of this article focuses on urban microcredit markets. Poor local information networks and weak social pressure in urban settings make joint liability unable to guarantee high repayment rates to microlenders. Yet, microcredit programmes in Western Europe report good performance even if the majority of them require no collateral. Data from three Italian microcredit institutions (MAGs) which operate in urban areas and grant individual loans without collateral to single entrepreneurs and associations or cooperatives, show that associations or cooperatives repay with higher probability. On this basis, a microlending instrument is described that, like joint liability implemented in rural economies, raises repayment rates but, unlike joint liability, fits the urban context in that it reproduces a cohesion among entrepreneurs based on profit-maximizing behaviour and not on social capital.