Flexible microfinance contracts can help borrowers mitigate the negative effects of income fluctuations. But the additional liquidity repayment flexibility entails can increase default. Can this risk be mitigated by using contract price as a screening mechanism? The authors implement a randomized experiment where, in treated branches, borrowers select between the standard, rigid contract and a more expensive flexible contract. In control branches, customers are only offered the standard contract.
Knowing What’s Good for You: Can a Repayment Flexibility Option in Microfinance Contracts Improve Repayment Rates and Business Outcomes?
Giorgia Barboni, Parul Agarwal
Financial Well-being and Social Protection