How Do Flexible Microfinance Contracts Improve Repayment Rates and Business Outcomes? Experimental Evidence from India

73 Pages Posted: 16 Feb 2023

See all articles by Giorgia Barboni

Giorgia Barboni

University of Warwick - Finance Group

Parul Agarwal

Krea University

Date Written: February 14, 2023

Abstract

Can financial innovations be offered in the presence of information frictions without increasing credit risk? We address this question through a randomized experiment with 799 microfinance clients holding microbusinesses in India. In treated branches, borrowers select between the standard rigid microfinance contract and a more expensive innovative contract designed to mitigate irregular business cash flows through repayment flexibility. In control branches, customers are only offered the standard contract. Offering a menu of contracts that vary in price and flexibility improves business outcomes without deteriorating repayment rates. These effects are driven by financially sophisticated microentrepreneurs selecting the flexible contract to a higher extent.

Keywords: Microfinance, Repayment Flexibility, Borrowers' Selection, Contract Design

JEL Classification: O12, O16, C93, D91

Suggested Citation

Barboni, Giorgia and Agarwal, Parul, How Do Flexible Microfinance Contracts Improve Repayment Rates and Business Outcomes? Experimental Evidence from India (February 14, 2023). Available at SSRN: https://ssrn.com/abstract=4358795 or http://dx.doi.org/10.2139/ssrn.4358795

Giorgia Barboni (Contact Author)

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

Parul Agarwal

Krea University

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