Repayment under Flexible Loan Contracts: Evidence from Tanzania

Discussion Papers 1884, 40 S.

Antonia Grohmann, Steffen Herbold, Friederike Lenel

2020

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Abstract

We study repayment and delinquency in an innovative loan contract that offers borrowers a wide range of flexibility. Using a large administrative dataset, we perform unsupervised pattern analysis to study how borrowers repay within the framework of this loan. We identify eight clusters that can be grouped into three distinct repayment types. We show that borrowers with fluctuating incomes and limited consumption smoothing resources use the loan’s flexibility more and that farmers in particular adjust their repayment to cash flow. Finally, we show that high use of the loan’s flexibility is associated with repayment difficulties, yet typically does not result in eventual default; whereas borrowers who face repayment difficulties that are likely driven by economic shocks face a high probability of default.

Antonia Grohmann

Research Associate in the International Economics Department



JEL-Classification: D14;G21;C55
Keywords: Fexible loans, loan contracts, repayment, microfinance