Knowing What’s Good for You: Can a Repayment Flexibility Option in Microfinance Contracts Improve Repayment Rates and Business Outcomes?
Repayment flexibility in microfinance contracts can enable clients to undertake higher return projects that have more irregular payment streams. But there is the risk of increased default due to time-inconsistent or excessively risky borrower behavior. How severe is this default risk and can it be mitigated simply by using contract price as a screening mechanism? To examine this we implement a randomized experiment with microfinance borrowers in Uttar Pradesh, India. In treated branches, borrowers select between the standard, rigid contract and a more expensive flexible contract. In control branches, customers are only offered the standard rigid contract. Clients in treated branches have higher repayment rates than control branches. We also find higher business sales in treatment compared to control group. Selection is an important mechanism – in treated branches, time-consistent and more financially disciplined borrowers are significantly more likely to opt for the flexible repayment schedule.

Written with Parul Agarwal, IFMR LEAD
Date: 1 May 2019, 12:30 (Wednesday, 1st week, Trinity 2019)
Venue: Manor Road Building, Manor Road OX1 3UQ
Venue Details: Lecture Theatre
Speaker: Giorgia Barboni (University of Warwick)
Organising department: Department of Economics
Organisers: Margaryta Klymak (Department of International Development), Rossa O'Keeffe-O'Donovan (Nuffield College), Michael Koelle (Pembroke College)
Organiser contact email address:
Part of: CSAE Lunchtime Seminars
Booking required?: Not required
Audience: Public
Editors: Suzanne George, Melis Clark, Anna Siwek