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Credit lines in microcredit: Short-term evidence from a randomized controlled trial in India

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  • Aragón, Fernando M.
  • Karaivanov, Alexander
  • Krishnaswamy, Karuna

Abstract

We study the short-term effect of flexible microcredit loans on small businesses. We use data from a randomized controlled trial that offered a credit line product to street vendors in India. The credit line retains standard features of microcredit such as joint liability, female borrowers and weekly meetings, but allows flexible borrowing and repayment, like a credit card. We find a positive effect on the vendors' gross profits: on average, a credit line increases profits by 7 percent compared to a standard microcredit term loan. The profit differential increases with time since loan disbursal, to about 15 percent after 18 weeks. The observed increase in profits appears to be mainly driven by the credit line allowing more flexible borrowing and repayments, and allowing vendors to invest in more profitable goods. Our findings highlight providing flexible loans as a viable strategy for raising the impact of microcredit.

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  • Aragón, Fernando M. & Karaivanov, Alexander & Krishnaswamy, Karuna, 2020. "Credit lines in microcredit: Short-term evidence from a randomized controlled trial in India," Journal of Development Economics, Elsevier, vol. 146(C).
    • Handle: RePEc:eee:deveco:v:146:y:2020:i:c:s0304387820300729
    DOI: 10.1016/j.jdeveco.2020.102497
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    Cited by:

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    2. Shahnaz Parvin, 2021. "Individual’s Perception in Microcredit: A Case Study in the Area of HSTU, Dinajpur, Bangladesh," International Journal of Science and Business, IJSAB International, vol. 5(8), pages 183-193.
    3. Masselus, Lise & Petrik, Christina & Ankel-Peters, Jörg, 2024. "Lost in the design space? Construct validity in the microfinance literature," Ruhr Economic Papers 1097, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    4. Giorgia Barboni, 2024. "Innovations in the repayment structure of microcredit contracts," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 40(1), pages 129-138.
    5. Samer Ali Al-shami & Abdullah Al Mamun & Nurulizwa Rashid & Mohammed Al-shami, 2021. "Microcredit Impact on Socio-Economic Development and Women Empowerment in Low-Income Countries: Evidence from Yemen," Sustainability, MDPI, vol. 13(16), pages 1-18, August.
    6. Nicholas Sabin, 2023. "Choosing partners: selection priorities of joint liability group leaders," Empirical Economics, Springer, vol. 64(1), pages 323-348, January.
    7. Catherine Karimi & Dr. Paul Gesimba & Dr. Peter Koome, 2023. "Effects of Loan Repayment Mechanism on Clients’ Livelihoods Sustainability: A Case of Deposit Taking Microfinance Institutions in Nakuru County, Kenya," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(10), pages 1956-1971, October.

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