Markov chain representation of individual and group lending in microcredit

Microcredit is a financial tool that provides small amounts of loan to low-income or poor people. An individual or a group can enter microlending and is expected to pay after an agreed period. In this research, a probabilistic approach through Markov chain representations of repayment processes for individual and group lending of two borrowers is revisited; and conditions for absence of strategic default are identified. Results are then extended to the case of three borrowers, as a Markov chain model is presented and a formula for the expected total discounted return of a borrower is obtained.Microcredit is a financial tool that provides small amounts of loan to low-income or poor people. An individual or a group can enter microlending and is expected to pay after an agreed period. In this research, a probabilistic approach through Markov chain representations of repayment processes for individual and group lending of two borrowers is revisited; and conditions for absence of strategic default are identified. Results are then extended to the case of three borrowers, as a Markov chain model is presented and a formula for the expected total discounted return of a borrower is obtained.