October 16, 2017
Activities /
Posted by NCID

There is an ongoing debate on how to provide sufficient opportunities for individuals to escape the woes of poverty. Small and medium enterprises are one way to do that. However, capital is required and traditional means of obtaining it are inaccessible. This is where Microfinance Institutions (MFI) come in and provide microcredit, even if no collateral is present. Despite this availability and accessibility, in Bangladesh take-up is unexpectedly low. This issue is well-known in the literature, as is the fact that microcredit might lack the long-lasting social impact economists foresaw.

As a result, tweaks have been introduced in the MFI’s business model. Assistant Professor of Economics at the University of Alicante, Marianna Battaglia, along with her coauthors, suggest flexible contracts. On October 16, Professor Battaglia presented the paper titled “Contractual flexibility in the credit market, selection into borrowing, and firm growth: Experimental evidence from Bangladesh as part of NCID’s Weekly Seminars.

“The interesting part is not only to know if this new type of loan can attract more people, but also what kind of people”, said Battaglia. A traditional microfinance loan must be repaid in monthly installments for twelve months. With the support of BRAC, a flexible contract, which allowed for the costless possibility of delaying payment up to two months, was offered randomly to eligible clients.

The objective was to identify the impact of such a contract on the whole market, which includes eligible and ineligible clients, and nonclients. Specifically, they wanted to estimate if it changed borrowers’ repayment behavior, altered the pool of borrowers , attracted new clients and made an impact on household and business outcomes. Dabi and Progoti loans were both considered. The former constitutes the traditional microfinance credit with an average size of 275 dollars. The latter is intended for SMEs and require collateral as their average size is approximately 2200 dollars.

Results were encouraging. Take-up of the flexible contract is relatively high, approximately 55%, although it is not universal. In contrast to a similar experiment, default rates decreased and there was higher client retention. Also, there was considerable selection effects on the pool of borrowers. Eligible clients who had the more productive business were attracted to the flexible clients. Ineligible clients changed their behavior to become eligible. Nonclients with entrepreneurial characteristics opened accounts even if, at the moment, they were not eligible. Finally, household and business outcomes had improved two years after the flexible contract was introduced. 

Battaglia believes that Bangladesh was the perfect country for her research: “Microfinance was born in Bangladesh. Also BRAC is from there and it is a poor country with a population of 200 million that offers many opportunities”, she concluded.