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Flexibility matters: do more rigid loan contracts reduce demand for microfinance?

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  • Pearlman, Sarah

Abstract

Despite the rapid expansion of microfinance services in the past several decades, the low use of formal credit exhibited by poor households, the high dropout rates experienced by many microfinance institutions, and the prevalence of dual credit markets, even in the most saturated markets, suggest that microcredit may fail to meet the needs of many poor households. This paper examines the importance of repayment rigidity in explaining these three phenomena. While repayment terms are one of many components of a credit contract, they may be of paramount importance for poor borrowers who face high levels of risk and limited means to manage it. Flexible repayment terms are a common feature of the informal loans that dominate poor households‟ financial lives, and significant evidence suggests they are a valued feature of informal contracts. Examining the importance of flexibility may illuminate the role that microfinance plays in the lives of poor households and improve understanding of how it can be used most effectively as a poverty alleviation tool.

Suggested Citation

  • Pearlman, Sarah, 2010. "Flexibility matters: do more rigid loan contracts reduce demand for microfinance?," Research Department working papers 214, CAF Development Bank Of Latinamerica.
  • Handle: RePEc:dbl:dblwop:214
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    File URL: https://scioteca.caf.com/handle/123456789/214
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    Citations

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    Cited by:

    1. Zibei Chen & Minchao Jin, 2017. "Financial Inclusion in China: Use of Credit," Journal of Family and Economic Issues, Springer, vol. 38(4), pages 528-540, December.
    2. Rajlakshmi Mallik, 2015. "Being Credit Rationed: Delay and Transaction Cost," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 17(02), pages 1-28.
    3. Antonia Grohmann & Steffen Herbold & Friederike Lenel, 2020. "Repayment under Flexible Loan Contracts: Evidence from Tanzania," Discussion Papers of DIW Berlin 1884, DIW Berlin, German Institute for Economic Research.
    4. Marc J. Epstein & Kristi Yuthas, 2013. "Rural Microfinance And Client Retention: Evidence From Malawi," Journal of Developmental Entrepreneurship (JDE), World Scientific Publishing Co. Pte. Ltd., vol. 18(01), pages 1-17.

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