How does contract design affect the uptake of microcredit among the ultra-poor?: experimental evidence from the river islands of Northern Bangladesh

Kazushi Takahashi, Shonchoy Abu S., Ito Seiro and Kurosaki Takashi

No 483, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)

Abstract: Despite the professed claims of microcredit alleviating poverty, little is known about what kind of credit contract is suitable for extremely poor households, also called the ultra-poor. To fill this knowledge gap, we initiated a field experiment in the river islands of northern Bangladesh, where a substantial portion of dwellers could be categorized as ultra-poor due to cyclic floods. We randomly offered four types of loans to such dwellers: regular small cash loans with one-year maturity, large cash loans with three-year maturity both with and without a one-year grace period, and in-kind livestock loans with three-year maturity and a one-year grace period. We compared uptake rates as well as the determinants of uptake and found that the uptake rate is the lowest for the regular contract, followed by the in-kind contract. Contrary to prior belief, we also found that the microcredit demand by the ultra-poor is not necessarily small, and in particular the ultra-poor are significantly more likely to join a microcredit program than the moderately poor if a grace period with longer maturity is attached to a large amount of credit, irrespective of whether the credit is provided in cash or in kind. This paper provides evidence that a typical microcredit contract with one-year maturity and without a grace period is not attractive to the ultra-poor. Microfinance institutions may need to design better credit contracts to address the poor's needs.

Keywords: Bangladesh; Microfinance; Poverty; Microcredit; Uptake; Ultra-poor; Program design (search for similar items in EconPapers)
JEL-codes: D12 G21 O12 O16 (search for similar items in EconPapers)
Date: 2014-11-01
New Economics Papers: this item is included in nep-dev, nep-exp and nep-mfd
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Citations: View citations in EconPapers (1)

Published in IDE Discussion Paper = IDE Discussion Paper, No. 483. 2014-11-01

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Related works:
Journal Article: How Does Contract Design Affect the Uptake of Microcredit among the Ultra-poor? Experimental Evidence from the River Islands of Northern Bangladesh (2017)
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