The Grameen Bank has improved the lives of several million poor people in rural Bangladesh by providing them with credit. Using an innovative group lending program, the bank has been able to recover 97% of its loans. This dissertation is an attempt to understand the intricacies of the Grameen Bank's credit program and to throw light on those features of its innovative institutional set-up that make it so successful in recovering its loans. The dissertation is divided into six chapters and organized as follows.

I first describe the institutional set-up of the Grameen Bank and its group lending program. I draw on material obtained from interviews with bank staff and borrowers during a field-trip to the Konokdia branch of the bank in Patuakhali. This is followed by an economic analysis of the bank's lending program. I analyze the multifaceted role of group lending in achieving the dramatically low default rates on loans. The emphasis is on isolating the specific ways in which the incentives created by the requirement to form groups affects group composition and the incentives for peer support, peer supervision, and loan repayment.

Using a formal model, I analyze the effect of one specific feature of the Grameen Bank -- "staggered disbursement" -- on the expected loan recovery rate. In a two borrower model I show that when loan disbursement is staggered, the probability of loan recovery is higher when borrowers are linked together in a group than when there is no such group interlinkage. I analyze the implications of loan staggering on borrower welfare.

The dissertation also includes an empirical analysis of the determinants of loan repayment in the Grameen Bank. Using panel data collected from a sample of Grameen Bank branches by the World Bank, I perform OLS, “fixed effects” and “random effects” regressions to examine the relationship between the variation in repayment rates across Grameen Bank branches and such variables as the average loan size, the proportion of loans to women and the distance of the branch from district headquarters. The results throw light on some of the theoretical issues raised in the earlier chapters. Chapter 6 concludes the dissertation.