New Economics Papers
on Microfinance
Issue of 2012‒09‒16
two papers chosen by
Aastha Pudasainee and Olivier Dagnelie

  1. Can an interest-free credit facility be more efficient than a usurious payday loan? By Murizah Osman Salleh; Aziz Jaafar; M. Shahid Ebrahim
  2. Loan regulation and child labor in rural India By Basab Dasgupta; Christian Zimmermann

  1. By: Murizah Osman Salleh (Bank Negara Malaysia and Bangor University); Aziz Jaafar (Bangor Business School); M. Shahid Ebrahim (Bangor Business School)
    Abstract: Permanent disequilibrium in mainstream credit markets have pushed the unbanked and underbanked households to frequent high cost payday loans for their liquidity needs. Associated with the latter are welfare-reducing issues of predation and debt-entrapment. In response to this market failure, we expound a simple model that integrates inexpensive interest-free liquidity facility within an endogenous leverage circuit. This builds on the technology of ROSCA/ ASCRA/ mutual/ financial cooperative and cultural beliefs indoctrinated in Islam. Results indicate that such a circuit moderates adverse selection and moral hazard issues more efficiently than payday loan and mainstream financier. Additionally, it does not suffer the drawbacks of welfare-reducing payday loans and also addresses financial exclusion in mainstream credit markets.
    Keywords: interest-free loan, payday loan, financial exclusion, liquidity facility, cooperatives
    JEL: D14 G29 G32 Z12
    Date: 2012–07
  2. By: Basab Dasgupta; Christian Zimmermann
    Abstract: We study the impact of loan regulation in rural India on child labor with an overlapping-generations model of formal and informal lending, human capital accumulation, adverse selection, and differentiated risk types. Specifically, we build a model economy that replicates the current outcome with a loan rate cap and no lender discrimination by risk using a survey of rural lenders. Households borrow primarily from informal moneylenders and use child labor. Removing the rate cap and allowing lender discrimination markedly increases capital use, eliminates child labor, and improves welfare of all household types.
    Keywords: Loans ; Child labor ; India
    Date: 2012

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