Act Now: Microcredit with Voluntary Contributions and Zero Interest Rate - Evidence from Pakistan

Mahreen Mahmud ()

Studies in Economics from School of Economics, University of Kent

Abstract: We study a unique microcredit model with zero interest rate and voluntary contributions, used by Akhuwat, a microfinance organization operating in Pakistan since 2001. Borrowers are encouraged to give any amount they wish to the organization every month, in addition to the instalment for the repayment of principal. These voluntary contributions result in an implicit interest rate of around 4.5%. The analysis of monthly data on voluntary contributions provide evidence that the organization is rewarding borrowers for their contributions by giving them repeat loans and that borrowers are strategically timing these voluntary contributions through their loan cycle to maximize impact. In the case of joint liability loans, borrowers in poorly performing groups make on average higher voluntary contributions, and voluntary contributions in a previous loan cycle correlate with borrower discipline in a subsequent loan cycle. Thus, voluntary contributions can signal borrower quality, and joint liability borrowers appear to be using them to signal their quality independently of their group.

Keywords: Microfinance; Voluntary Contributions; Social Capital (search for similar items in EconPapers)
JEL-codes: D64 O12 O16 (search for similar items in EconPapers)
Date: 2015-07
New Economics Papers: this item is included in nep-dev and nep-mfd
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