Simultaneous Borrowing and Saving in Microfinance

Dyotona Dasgupta and Prabal Roy Chowdhury ()
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Prabal Roy Chowdhury: Indian Statistical Institute, Delhi

Discussion Papers from Indian Statistical Institute, Delhi

Abstract: This paper studies dynamic incentives provided by the microfinance institutions (MFIs) to ensure repayment. MFIs provide collateral-free loans, and yet observe near perfect repayment rate. In this paper, we provide an explanation of two widely practised mechanisms by MFIs – progressive lending i.e. increasing loan size over time and deposit collection. In our model, the MFI provides both credit and savings services. These help a strategic, poor borrower to accumulate a lumpsum amount and “graduate†to an improved lifetime utility which is not achievable when only credit is provided. These savings also act as an incentive device for repayment. We find that the optimal loan scheme is weakly progressive. It is “progressive with a cap†when the increase in utility from graduation is “modestly positive†. Further, we show that, since the MFI is benevolent, an improvement in the borrower’s outside option lengthens the time required to graduate which in turn reduces her welfare.

Keywords: dynamic incentives; progressive lending; deposit collection; collateral substitute; graduation (search for similar items in EconPapers)
JEL-codes: D86 G21 O12 O16 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2020-11
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-mfd and nep-upt
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