Should Flexibility Matter? A Poor Consumer’s Perspective of Flexible Micro Loans

Abstract

Repayment schedules characterizing a typical micro loan are rigid and offer little to no flexibility in terms of rescheduling repayments when faced with emerging contingencies. Such rigid structures affect the economic as well as the psychological well-being of the poor leading to underinvestment of the borrowed capital, lower motivational levels and lowered sense of psychological well-being among the underprivileged. Flexibility in loan contracts and repayment schedules can alleviate these adverse effects on the poor and bring the microfinance institutions closer to their goal of poverty alleviation and welfare objectives. In this article, a case is made in favour of flexible loan contracts and repayment schedules based on the psychological underpinnings of decision making among the underprivileged. Implications of such loan contracts on consumer welfare and the microfinance institutions (MFIs) are discussed.

Keywords

Micro loans microfinance institutions flexibility consumer psychology

Get full access to this article

View all access options for this article.

References

Banerjee

A.V.

, & Duflo

(2011). Poor economics: A radical rethinking of the way to fight global poverty. London: Random House.

Boucher

, & Guirkinger

(2007). Risk, wealth, and sectoral choice in rural credit markets. American Journal of Agricultural Economics, 89(4), 991–1004.

Chakravarti

(2006). Voices unheard: The psychology of consumption in poverty and development. Journal of Consumer Psychology, 16(4), 363–376.

de Aghion

A. B.

, & Murdoch

(2005). The economics of microfinance. Cambridge: MIT Press.

de Janvry

, Sadoulet

, Coulibaly

, & Abordonado

(2013). Flexible financial products in microfinance to address risk. Working Paper Prepared for FERDI Workshop on Flexible Financial Products in Microfinance to Address Risk.

Field

, Pande

, Papp

, & Park

Y. J.

(2012). Repayment flexibility can reduce financial stress: A randomized control trial with microfinance clients in India. PLOS ONE, 7(9), 1–7.

Hwang

J. J.

(2011). Demand for flexibility in microfinance loans: Evidence from India. Dissertation Chapter, Northwestern University.

Karim

(2011). Microfinance and its discontents: Women in debt in Bangladesh. Minneapolis: University of Minnesota Press.

Karlan

, & Mullainathan

(2006). Is Microfinance Too Rigid?. Financial Access Initiative Concept Note, Issue 2 (August), Institute of Financial Management and Research. Retrieved from http://ifmrlead.org/cmf/wp-content/uploads/attachments/csy/769/CMF-EOMF-02-(Final)-w.pdf (accessed on 16 September 2015 )

10.

Moller

A. C.

, Ryan

R.M.

, & Deci

E.L.

(2006). Self-determination theory and public policy: Improving the quality of consumer decisions without using coercion. Journal of Public Policy & Marketing, 25(1), 104–116.

11.

Narayan-Parker

, Patel

, Schafft

, Rademacher

, & Koch-Schulte

(2000). Voices of the poor: Can anyone hear us?: Oxford University Press for the World Bank, New York, NY.

12.

Porcelli

A.J.

, & Delgado

M.R.

(2009). Acute stress modulates risk taking in financial decision making. Psychological Science, 20(3), 278–283.

13.

Prelec

, & Loewenstein

(1998). The red and the black: Mental accounting of savings and debt. Marketing Science, 17(1), 4–28.

14.

Shonchoy

, & Kurosaki

(2013). Impact of flexible microcredit on repayment and food consumption: Experimental evidence from rural Bangladesh. Empirical Micro Research Seminar, the University of Tokyo.

15.

Sriram

M. S.

(2010). Microfinance: A fairy tale turns into a nightmare. Economic and Political Weekly, 45(43), 10–13.