Impact of seasonality-adjusted flexible microcredit on repayment and food consumption: experimental evidence from rural Bangladesh

Shonchoy Abu S. and Kurosaki Takashi

No 460, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)

Abstract: The mismatch between credit repayments and income seasonality poses a challenge for microfinance institutions (MFIs) working in developing countries. For instance, in northern Bangladesh, income and consumption downfalls during the lean season after the transplanting of major paddy crops are a serious threat to a household's economy. Poor landless agricultural wage laborers suffer the most owing to this seasonality as they face difficulties in smoothing their consumption. However, in designing microcredit products, MFIs do not usually provide flexibility or seasonal adjustment during the lean season. This is mainly because MFIs are afraid that such flexibility might break the repayment discipline of borrowers, resulting in higher default rates. We thus conducted a randomized controlled trial in 2011-12 in northern Bangladesh to empirically test whether seasonality-adjusted flexible microcredit leads to an increase in repayment problems for MFIs as well as whether it can increase and stabilize consumption of borrower households. Our results suggest no statistically discernible difference among the treatment arms in case of default, overdue amount, or repayment frequency. On the other hand, we find no positive impact of repayment flexibility on immediate food consumption during the period of seasonality, except for in-kind full moratorium treatment group. After a year of initial intervention, however, we see positive changes in food intake during the lean season. Thus, our preliminary results are in favor of seasonality-adjusted flexible microcredit.

Keywords: Bangladesh; Microfinance; Rural credit; Consumption; Microcredit; Default; Seasonality; Consumption Smoothing (search for similar items in EconPapers)
JEL-codes: D12 G21 O16 (search for similar items in EconPapers)
Date: 2014-03-01
New Economics Papers: this item is included in nep-agr, nep-dev, nep-exp and nep-mfd
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Citations: View citations in EconPapers (4)

Published in IDE Discussion Paper = IDE Discussion Paper, No. 460. 2014-03-01

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