nep-mfd New Economics Papers
on Microfinance
Issue of 2020‒08‒10
four papers chosen by
Olivier Dagnelie
Université de Caen

  1. A Theory of Progressive Lending By Dyotona Dasgupta; Dilip Mookherjee
  2. Repayment under Flexible Loan Contracts: Evidence from Tanzania By Antonia Grohmann; Steffen Herbold; Friederike Lenel
  3. Rural Transformation, Inequality, and the Origins of Microfinance By Suesse, Marvin; Wolf, Nikolaus
  4. Cash Transfers and Micro-Enterprise Performance: Theory and Quasi-Experimental Evidence from Kenya By Olivier Sterck; Antonia Delius

  1. By: Dyotona Dasgupta (Centre for Development Economics, Delhi School of Economics); Dilip Mookherjee (Department of Economics, Boston University)
    Abstract: We characterize Pareto efficient long term ‘relational’ lending contracts with one-sided lender commitment, to finance specific investments and smooth intertemporal consumption of a borrower who cannot commit to repaying loans. The borrower can save and accumulate assets, and has strictly concave preferences over consumption. For borrowers with initial wealth above a threshold, the first-best is sustainable with a stationary contract. For poorer agents, there is perpetual but shrinking underinvestment which disappears in the long run. Borrowing, investment and wealth grow and converge to the first-best threshold. Optimal allocations can be implemented by backloaded ‘progressive’ lending: a sequence of one period loans of growing size. Increased borrower bargaining power raises short run consumption and investment, with no long term effects. We discuss extensions to incorporate random productivity shocks.
    JEL: O16 G21 D86
    Date: 2020–07
  2. By: Antonia Grohmann; Steffen Herbold; Friederike Lenel
    Abstract: We study repayment and delinquency in an innovative loan contract that offers borrowers a wide range of flexibility. Using a large administrative dataset, we perform unsupervised pattern analysis to study how borrowers repay within the framework of this loan. We identify eight clusters that can be grouped into three distinct repayment types. We show that borrowers with fluctuating incomes and limited consumption smoothing resources use the loan’s flexibility more and that farmers in particular adjust their repayment to cash flow. Finally, we show that high use of the loan’s flexibility is associated with repayment difficulties, yet typically does not result in eventual default; whereas borrowers who face repayment difficulties that are likely driven by economic shocks face a high probability of default.
    Keywords: Fexible loans, loan contracts, repayment, microfinance
    JEL: D14 G21 C55
    Date: 2020
  3. By: Suesse, Marvin; Wolf, Nikolaus
    Abstract: What determines the development of rural financial markets? Starting from a simple theoretical framework, we derive the factors shaping the market entry of rural microfinance institutions across time and space. We provide empirical evidence for these determinants using the expansion of credit cooperatives in the 236 eastern counties of Prussia between 1852 and 1913. This setting is attractive as it provides a free market benchmark scenario without public ownership, subsidization, or direct regulatory intervention. Furthermore, we exploit features of our historical set-up to identify causal effects. The results show that declining agricultural staple prices, as a feature of structural transformation, leads to the emergence of credit cooperatives. Similarly, declining bank lending rates contribute to their rise. Low asset sizes and land inequality inhibit the regional spread of cooperatives, while ethnic heterogeneity has ambiguous effects. We also offer empirical evidence suggesting that credit cooperatives accelerated rural transformation by diversifying farm outputs.
    Keywords: credit cooperatives; Land Inequality; Microfinance; Prussia; rural transformation
    JEL: G21 N23 O16 Q15
    Date: 2019–12
  4. By: Olivier Sterck; Antonia Delius
    Abstract: Theoretically, the effect of household cash transfers depends on how businesses respond to the demand shock and on the resulting effect on prices. Such market effects have been largely overlooked in the literature, which mostly focuses on direct impacts on households. We study the impact of a household cash transfer program on retail businesses operating in two refugee sites in Kenya. Refugees receive a monthly mobile money transfer that can only be spent at licensed businesses. We compare licensed and unlicensed businesses, using matching methods to control for all variables considered in the licensing process. We show that licensed businesses- have much higher revenues and profits and charge higher prices than unlicensed businesses. The cash transfer program created a parallel retail market in which a limited number of businesses enjoy high market power. We identify a series of market imperfections explaining the results.
    Keywords: Cash Transfers; Micro-Enterprises; Market imperfections; Salop circle
    JEL: L2 O2 O12
    Date: 2020

This nep-mfd issue is ©2020 by Olivier Dagnelie. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.