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Microcredit Revisited: Towards More Flexible Loan Contracts

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Seasonality and Microcredit

Part of the book series: SpringerBriefs in Economics ((BRIEFSECONOMICS))

Abstract

Group liability and a fixed repayment schedule with frequent installments are prominent features of microcredit loan contracts. These rules make it possible for lenders to reduce lending costs and provide borrowers with appropriate incentives to repay. Sometimes they facilitate mutual insurance among members and improve the welfare of borrowers by providing a commitment device that induces saving-like behaviors. However, they also impose considerable burdens on borrowers. This chapter reviews selected literature on the rigidity and flexibility of microcredit contracts and provides an overview of the microfinance revolution and its current presence in various parts of the world.

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Notes

  1. 1.

    Wydick finds that intensive monitoring and the willingness to punish misbehaviors are associated with high repayment rates. However, previously existing social ties are not necessarily prerequisites for the intensity of monitoring or strict enforcement.

  2. 2.

    The clients in their experiment are on individual liability lending contracts, while groups are formed only for cost-saving reasons. The endogenous self-selection problem, therefore, is not a serious issue in their study.

  3. 3.

    At the same time, the Grameen Bank introduced new saving products to the market. I discuss the roles of savings and flexible repayment schedules in subsequent sections.

  4. 4.

    In general, the amount of the renewed loan is greater than that of the previous cycle. This feature of progressive lending strengthens the effects of dynamic incentives.

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Authors and Affiliations

  1. Institute of Developing Economies, Japan External Trade Organization (IDE-JETRO), 3-2-2 Wakaba, Mihama-ku, Chiba, 261-8545, Japan

    Kazunari Tsukada

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  1. Kazunari Tsukada
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Correspondence to Kazunari Tsukada .

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  1. IDE-JETRO, Chiba, Chiba, Japan

    Abu S. Shonchoy

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Tsukada, K. (2014). Microcredit Revisited: Towards More Flexible Loan Contracts. In: Shonchoy, A. (eds) Seasonality and Microcredit. SpringerBriefs in Economics. Springer, Tokyo. https://doi.org/10.1007/978-4-431-55010-5_2

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