Strategic default, multiple installments, and the role of informal moneylender in microcredit contract

Khan Jahirul Islam

International Journal of Economic Theory, 2023, vol. 19, issue 2, 204-220

Abstract: I model the role of strategic defaults and informal moneylenders on multiple‐installment loan contracts offered by microfinance institutions (MFIs). The results show that a single‐installment loan is not viable due to MFIs' vulnerability to strategic defaults and borrowers' lack of collateral. In contrast, a multiple‐installment contract requires borrowers to borrow from the moneylender, who is immune to strategic default, in order to repay the MFI's early installments that are due before the project yields a return. Consequently, both default costs and borrowing costs increase and incentives to commit strategic default decline, making the multiple‐installment contract profitable for MFIs.

Date: 2023
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