For microfinance institutions (MFIs) with double bottom line objectives and trade‐offs, the optimal loan size can be determined by using a combination of Markovian Chains with transition probabilities and expected cash flows. Progressive lending may be safe over a range of loan sizes, beyond which a rational borrower would indulge in a strategic default. This range of safe loan sizes may depend on borrower characteristics (risk‐taking, self‐confidence, productivity, interest rates, subsistence needs) and the Microfinance Institution's strategy (financial inclusion objective, progressive lending). MFIs can improve the objective functions by better communication and encouragement of borrowers to increase their confidence in each stage and reassuring them that entrepreneurial failure will not mean being denied a second chance.

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We consider a Markov-Chain model for a Microfinance Institution (MFI) borrower who can be in one of four states: Applicant (A), Beneficiary (B − or B + ) of a small or a large loan, or included (I) in the regular banking system. Given the transition matrix we compute the equilibrium and deduce the influence of probability parameters on what is profitable to the borrower within breaking-even constraints of the MFI. We give a general theorem on the total expected actualized income of a Markov Chain with Income (MCI), that we then apply to our model to determine the constrains emerging from Absence of Strategic Default (ASD) requirements. These do not only bound the probabilities from above but sometimes also from below.

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