Applied Seminar

Marianna Battaglia

Universidad de Alicante

6-Jun-2018

Seminar 3 – 14:30

Abstract

We study how greater repayment flexibility in microfinance affects the growth of firms taking up the flexible contract as well as the pool of borrowers who select into borrowing. Using a cluster-randomized design, we find that clients with access to the flexible contract scale up their borrowing, increase their investments, and experience higher but more volatile revenues. Household income and landownership improve and they are more likely to remain with the lender. Among the clients who were offered the new contract, those with lower risk aversion took up the flexible loan at a greater rate. We also track the borrowing decisions of a representative sample of microenterprises in treatment and control areas to study which types of firms become microfinance clients after the introduction of the new loan. We show that firms with less risk averse owners, those who had expressed an interest to start another business or hire more workers, and firms with higher productivity at baseline were more likely to become clients. Overall, our findings imply that introducing repayment flexibility can improve the effectiveness of microcredit in terms of firm growth as well as attract less risk averse and more productive clients, with a desire to undertake longer-term and riskier investments.

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