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Repayment under Flexible Loan Contracts: Evidence from Tanzania

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  • Antonia Grohmann
  • Steffen Herbold
  • Friederike Lenel

Abstract

We study repayment and delinquency in an innovative loan contract that offers borrowers a wide range of flexibility. Using a large administrative dataset, we perform unsupervised pattern analysis to study how borrowers repay within the framework of this loan. We identify eight clusters that can be grouped into three distinct repayment types. We show that borrowers with fluctuating incomes and limited consumption smoothing resources use the loan’s flexibility more and that farmers in particular adjust their repayment to cash flow. Finally, we show that high use of the loan’s flexibility is associated with repayment difficulties, yet typically does not result in eventual default; whereas borrowers who face repayment difficulties that are likely driven by economic shocks face a high probability of default.

Suggested Citation

  • 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.
    • Handle: RePEc:diw:diwwpp:dp1884
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    Cited by:

    1. Weisser, Christoph & Lenel, Friederike & Lu, Yao & Kis-Katos, Krisztina & Kneib, Thomas, 2021. "Using solar panels for business purposes: Evidence based on high-frequency power usage data," University of Göttingen Working Papers in Economics 428, University of Goettingen, Department of Economics.
    2. Ölkers, Tim & Liu, Shuang & Mußhoff, Oliver, 2023. "A typology of Malian farmers and their credit repayment performance - An unsupervised machine learning approach," 97th Annual Conference, March 27-29, 2023, Warwick University, Coventry, UK 334547, Agricultural Economics Society - AES.

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    More about this item

    Keywords

    Fexible loans; loan contracts; repayment; microfinance;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis

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