A Little at A Time: The Use of Regularly Scheduled Repayments in Microfinance
The paper attempts to understand the impact of rigidly programmed repayment schedules employed by MFIs on the microfinance industry, which also includes informal lenders operating in the same marketplace. It presents evidence of participation by MFI clients in the informal credit market, sometimes to repay loans taken from MFIs.
The paper presents a predictive three-sided model consisting of the borrower, the MFI, and the informal sector lender(s). Utilizing the model, the paper establishes that in the presence of the informal sector:
- Strict installment repayment plan serves to mitigate informational problems that microcredit programs face;
- Installment plan does better than cofinancing, which requires the borrower to raise part of the loan elsewhere.
The paper places the predictions of the model relative to the stylized facts available in literature, and discusses directions for future research. In conclusion, the paper suggests that the widespread use of installment repayments may be understood as a response to the information asymmetries that persist between borrowers and microcredit institutions. This response is meaningful only when one also considers the environment in which microcredit programs frequently operate, where informal credit markets are well developed.
