Microfinance in Times of Crisis: The Effects of Competition, Rising Indebtedness, and Economic Crisis on Repayment Behavior

The paper describes four major incentives for timely loan repayments:

• The collateral for the loan is confiscated if the client does not repay the loan.
• The access to future loans is denied if the client does not repay the loan.
• Conditions of the loan improve if the client makes timely repayments.
• The income of the client is sufficiently high to enable her/him to repay the loan.

The paper lists some of the effects of competition on loan repayment behavior as:

• In situations with high competition, there is an increased level of indebtedness leading to repayment problems.
• Clients are more aware of the importance of repayments in an environment where micro-loans are a part of the day to day business.
• Clients are more likely to pay punctually in a branch with high competition
• The influence of economic crisis on repayment behavior is negative but insignificant.

Some of the other findings of the study are:

• Prior late repayments have a very strong negative influence on current repayments. If clients had overdue payments in their prior loans, they are more likely to make late payments in the future.
• In the later years of the loan repayment period, many clients have a relatively low non-business income, making repayments difficult.