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

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  • Khan Jahirul Islam

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.

Suggested Citation

  • Khan Jahirul Islam, 2023. "Strategic default, multiple installments, and the role of informal moneylender in microcredit contract," International Journal of Economic Theory, The International Society for Economic Theory, vol. 19(2), pages 204-220, June.
    • Handle: RePEc:bla:ijethy:v:19:y:2023:i:2:p:204-220
    DOI: 10.1111/ijet.12360
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    References listed on IDEAS

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