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Abstract:

Development Discussion Paper
Repayment Frequency in Microfinance Contracts with Present-Biased Borrowers
Greg Fischer and Maitreesh Ghatak
July 2010
Paper No' EOPP 021:
Full Paper (pdf)

JEL Classification: O12, O16, D03


Tags: microfinance; repayment frequency; present-bias

This paper analyzes the theoretical underpinnings of high-frequency repayment, a feature in nearly all microfinance contracts that has been largely overlooked by theorists. The pervasive belief among practitioners that frequent repayment is critical in achieving high repayment rates is puzzling. Classically rational individuals should benefit from more flexible repayment schedules, and less frequent repayment should increase neither default nor delinquency. This paper proposes a simple explanation based on present bias. For such individuals, more frequent repayment can increase the maximum incentive compatible loan size. However, the welfare effects are ambiguous. More frequent repayment can lead to over-borrowing, reducing welfare as it increases loan sizes.4