Risk management in microfinance: using peer monitoring as a management control

Purpose This microfinance study contributes to the gap in knowledge about the influence of peer monitoring on clients’ diversion of borrowed funds for unapproved purposes. Design/methodology/approach A cross-sectional field study was employed to investigate main effects and interactions on a variety of borrower characteristics. Loan diversion served as a dichotomous-dependent variable. Findings The results confirm that peer monitoring prevents fund diversion. However, fund diversion is influenced by borrowers’ characteristics such as duration of association with their microfinance group, lack of autonomy in financial decision and alternative sources of income. Practical implications Defining specific contributory individual differences can assist in the development of best practices in microfinance sustainability. The study offers practical implications that lenders should not assume peer monitoring to be unconditionally effective. Social implications Recognition of contributory elements of moral hazard in microfinance lending can help balance business viability with altruistic intent toward a vulnerable and underserved borrower segment. Originality/value Other studies have taken more macro-perspectives on enterprise risk management in microfinance, while we go to the end user as the unit of measure. We advance peer monitoring theory. Another important contribution is in fund diversion, rather than the repayment/default focus of previous studies.