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How far can we go? Determining the optimal loan size in progressive lending

Nahla Dhib () and Arvind Ashta ()
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Nahla Dhib: Université Côte D'Azur, CNRS, LJAD (France)

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Abstract: The microcredit literature indicates that progressive lending should reduce default rates but that it may lead to over-indebtedness. In this study, we show that progressive lending may be safe over a range of loan sizes, beyond which a rational borrower would indulge in a strategic default. This range of loan sizes may be dependent on borrower characteristics (risk-taking, self-confidence, productivity, interest rates, subsistence needs) as well as the Microfinance Institution's strategy. Many crowdfunding sites are using artificial intelligence to assess borrower risk through social ratings. We are arguing that production functions of the borrowers also need to be added.

Date: 2020-11-12
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-mfd
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