Give Me a Pass: Flexible Credit for Entrepreneurs in Colombia

Brune, Lasse; Giné, Xavier; Karlan, Dean

doi:10.3386/w30634

2022

DOI: 10.3386/w30634

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Give Me a Pass: Flexible Credit for Entrepreneurs in Colombia

Lasse Brune¹,

Xavier Giné²,

Dean Karlan³

Abstract: Although microcredit has reached millions, recent randomized evaluations find limited average business impacts. Contract rigidity, specifically the fixed and frequent installments, may limit productive risk-taking and thus diminish impact on average profits but risk triggering moral hazard. We test this with a Colombian lender that experimentally compared, for a sample of new borrowers, rigid lending to a loan product that included three "passes" to push off a monthly payment to the future. The flexible loan d… Show more

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Cited by 3 publications

References 17 publications

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Demand for Commitment in Credit and Saving Contracts: A Field Experiment

Afzal,

d’Adda,

Fafchamps

et al. 2024

The Economic Journal

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We conduct a field experiment in which we offer credit and saving contracts to the same pool of Pakistani microfinance clients. Additional treatments test ex ante demand for soft commitment (in the form of reminders, either to respondents or to their families), hard commitment (in the form of a penalty for missing an instalment), and flexibility (an option to postpone an instalment) to save or pay loan instalments on time. We find substantial demand for fixed-repayment contracts in both the credit and savings domains, in ways that imply that respondents value the commitment required. While we find little or no average demand for additional contractual features, we nonetheless observe that different combinations of contractual add-ons are preferred depending on the respondent’s level of financial discipline. Respondents with high financial discipline prefer flexibility in credit contracts when combined with reminders to self while those with low discipline value penalties in savings contracts only when paired with reminders. Our results imply that, for the average microfinance client, demand for commitment is met through the regular payment schedule built into standard microcredit or commitment savings contracts. However, combining penalties or flexibility with reminders may appeal to certain subsets of clients.

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Demand for Commitment in Credit and Saving Contracts: A Field Experiment

Afzal,

d’Adda,

Fafchamps

et al. 2024

The Economic Journal

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Innovations in the repayment structure of microcredit contracts

Barboni

2024

Oxford Review of Economic Policy

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Microfinance contracts typically require a fixed repayment schedule that, while ensuring repayment discipline, may inhibit entrepreneurship and business growth. In this article, I review the recent developments in the literature studying innovations in the repayment structure of microcredit contracts. Introducing flexible repayment schedules improves business outcomes by allowing microcredit borrowers to increase investment and to respond to income fluctuations to a higher extent. Although financial innovations hold the promise to foster business growth, and evidence suggests that their demand appears concentrated among financially sophisticated borrowers, they are feared to increase credit risk and hence their adoption among microfinance institutions is very limited. I explore potential challenges lenders face in offering these innovations and outline pathways towards a profitable implementation of such contracts.

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Nudging Payment Behavior: Evidence from a Field Experiment on Pay-as-You-Go Off-Grid Electricity

Bonan

d’Adda

Mahmud

et al. 2023

The World Bank Economic Review

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This paper reports results from a randomized control trial with a pay-as-you-go (PAYG) solar system provider in Pakistan. In the default treatment, customers are told the amount to pay every month to keep the system active. In a first treatment, customers are assisted in planning this monthly payment. A second treatment discloses that payments can be made flexibly within the month. This disclosure may reduce contract cancellation by helping minimize transaction costs but may increase contract complexity and reduce discipline. A third treatment combines flexibility with assistance in planning payments. Disclosing flexibility increases contract cancellation relative to the default, but combining flexibility with planning offsets this effect. Treatment effects appear stronger among users facing high mental constraints and transaction costs. These findings support the idea that behavioral factors, such as inattention and commitment problems, lay behind the negative impact of flexibility on cancellation. The results suggest that providers of PAYG systems may face a trade-off between disclosing complex contractual features and customer retention. Planning helps customers handle the added complexity.

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Give Me a Pass: Flexible Credit for Entrepreneurs in Colombia

Cited by 3 publications

References 17 publications

Demand for Commitment in Credit and Saving Contracts: A Field Experiment

Demand for Commitment in Credit and Saving Contracts: A Field Experiment

Innovations in the repayment structure of microcredit contracts

Nudging Payment Behavior: Evidence from a Field Experiment on Pay-as-You-Go Off-Grid Electricity

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