Balancing Flexibility and Discipline in Microfinance: Innovative Financial Products that Benefit Clients and Service Providers

This paper describes innovative, market-oriented microfinance products that combine flexibility with financial discipline. It explores how microfinance contracts may mix flexible features and enforcement devices, in ways that meet clients’ cash needs while enhancing clients’ financial discipline.

The paper presents nine examples of flexible products, including microcredit, microsavings, and microinsurance. The authors find that introducing flexibility requires MFIs to adopt alternative enforcement mechanisms for establishing clients’ discipline. For example, introducing flexibility in loan contracts requires MFIs to adopt rigorous lending policies. Conclusions include:

• Service providers are introducing various types of flexibility into financial contracts;
• Flexibility combined with appropriate enforcement mechanisms may enhance clients’ financial discipline;
• Flexibility may require information-intensive lending technologies that raise MFIs’ costs of screening and monitoring clients, and have a limited outreach;
• Flexibility and discipline could be offered in separate products accessible simultaneously to clients.