Repayment under Flexible Loan Contracts: Evidence from Tanzania
49 Pages Posted: 12 Aug 2020
Date Written: July 2020
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: Suggested Citation