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Compulsory versus voluntary savings as an incentive mechanism in microfinance programs

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  • Bruno, Olivier
  • Khachatryan, Knar

Abstract

This paper investigates the incentive mechanism of individual microlending contracts focusing particularly on microsavings. We built a model to show the role of compulsory and voluntary microsavings in addressing problems of information asymmetries. Our results are twofold. First, we show that compulsory savings creates incentive conditions required for allowing micro-entrepreneurs to be financed by a Microfinance institution. Second, we show that voluntary savings can serve as a complementary tool to repayment enforcement at the same time inducing borrowers to reveal abilities of their projects.

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  • Bruno, Olivier & Khachatryan, Knar, 2020. "Compulsory versus voluntary savings as an incentive mechanism in microfinance programs," Journal of Behavioral and Experimental Finance, Elsevier, vol. 26(C).
    • Handle: RePEc:eee:beexfi:v:26:y:2020:i:c:s2214635019302540
    DOI: 10.1016/j.jbef.2020.100317
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    More about this item

    Keywords

    Microfinance; Compulsory microsavings; Voluntary microsavings; Incentive mechanism; Repayment enforcement; Screening;
    All these keywords.

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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