Does the Classic Microfinance Model Discourage Entrepreneurship Among the Poor? Experimental Evidence from India †

TLDR: In this article, the authors compare the classic microfinance contract which requires that repayment begin immediately after loan disbursement to a contract that includes a two-month grace period, finding that the provision of a grace period increased short-run business investment and long-run profits but also default rates.

Abstract: Do the repayment requirements of the classic microfinance contract inhibit investment in high-return but illiquid business opportunities among the poor? Using a field experiment, we compare the classic contract which requires that repayment begin immediately after loan disbursement to a contract that includes a two-month grace period. The provision of a grace period increased short-run business investment and long-run profits but also default rates. The results, thus, indicate that debt contracts that require early repayment discourage illiquid risky investment and thereby limit the potential impact of microfinance on microenterprise growth and household poverty. (JEL A21, G32, I32, L25, L26, O15, O16)

Full text

Does the Classic Microfinance Contract Discourage Entrepreneurship Among the
Poor? Experimental Evidence from India
By ERICA FIELD, ROHINI PANDE, JOHN PAPP, AND NATALIA RIGOL
ONLINE APPENDIX

Online Appendix Figure 1: Distribution of business expenditures divided into Rs.1000 bins by grace and regular clients. The
figure is top coded at Rs.10000 and it is constructed using data from Survey 2.
Online Appendix Figure 2: Distribution of Business Types for New Businesses of Regular (left) and Grace (right) Period
Clients
1
1
See Footnote 1 for description of major types of businesses within each grouping.