Does the Classic Microfinance Model Discourage Entrepreneurship Among the Poor? Experimental Evidence from India

Erica Field, Rohini Pande, John Papp, Natalia Rigol


Do the repayment requirements of the classic microfinance contract inhibit investment in high-return but illiquid business opportunities among the poor? Using a field experiment, the authors of this paper compare the classic contract which requires that repayment begin immediately after loan disbursement to a contract that includes a two-month grace period. The provision of a grace period increased short-run business investment and long-run profits but also default rates. The results, thus, indicate that debt contracts that require early repayment discourage illiquid risky investment and thereby limit the potential impact of microfinance on microenterprise growth and household poverty.


Journal Article

Thematic Area

Financial Well-being and Social Protection