Microfinance Horizon

Author(s): Erica Field, Rohini Pande, John Papp and Natalia Rigol

Abstract:

Financiers across the world structure debt contracts to limit the risk of entrepreneurial lending. However, certain debt structures that reduce risk may inhibit enterprise growth, especially among the poor. We use a field experiment to estimate the short- and long-run impacts of varying the term structure of the classic microfinance loan product. While the classic microfinance loan contract requires clients to make small and frequent repayment installments beginning immediately after loan disbursement, clients in our treatment group instead received a two-month grace period before repayment began. The shift to a grace period contract increased clients’ business investments in the short run and profits and income in the long run, but also their rate of default, indicating a shift towards investments with higher average but also more variable returns. In this manner, the absence of a grace period reduces risk but also the potential impact of microfinance on microenterprise growth and household poverty.

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