Repayment under Flexible Loan Contracts: Evidence from Tanzania

42 Pages Posted: 12 Aug 2020

See all articles by Antonia Grohmann

Antonia Grohmann

Aarhus University

Steffen Herbold

affiliation not provided to SSRN

Friederike Lenel

University of Goettingen (Göttingen)

Date Written: July 2020

Abstract

We study repayment and delinquency in an innovative loan contract that offers borrowers a wide range of flexibility. Using a large administrative dataset, we perform unsupervised pattern analysis to study how borrowers repay within the framework of this loan. We identify eight clusters that can be grouped into three distinct repayment types. We show that borrowers with fluctuating incomes and limited consumption smoothing resources use the loan’s flexibility more and that farmers in particular adjust their repayment to cash flow. Finally, we show that high use of the loan’s flexibility is associated with repayment difficulties, yet typically does not result in eventual default; whereas borrowers who face repayment difficulties that are likely driven by economic shocks face a high probability of default.

Keywords: Fexible loans, loan contracts, repayment, microfinance

JEL Classification: D14,G21,C55

Suggested Citation

Grohmann, Antonia and Herbold, Steffen and Lenel, Friederike, Repayment under Flexible Loan Contracts: Evidence from Tanzania (July 2020). DIW Berlin Discussion Paper No. 1884, Available at SSRN: https://ssrn.com/abstract=3671344 or http://dx.doi.org/10.2139/ssrn.3671344

Antonia Grohmann (Contact Author)

Aarhus University ( email )

Nordre Ringgade 1
DK-8000 Aarhus C, 8000
Denmark

Steffen Herbold

affiliation not provided to SSRN

Friederike Lenel

University of Goettingen (Göttingen) ( email )

Wilhelmsplatz 1
Göttingen, 37073
Germany

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