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Simultaneous borrowing and saving in microfinance
[Microfinance beyond group lending]

Author

Listed:
  • Dyotona Dasgupta
  • Prabal Roy Chowdhury

Abstract

This paper provides a rationale for one of the most widely practised mechanisms by microfinance institutions (MFIs)—simultaneous borrowing and saving. Unlike the existing literature, our explanation does not involve any behavioral aspect. We study a dynamic relationship between a benevolent MFI and a borrower who is subject to an ex post moral hazard problem. The optimum contract involves simultaneous borrowing and saving—at each date, the MFI provides a small loan, the borrower invests that in a production technology, and saves the net return with the MFI. These help her to accumulate a lumpsum amount and ‘graduate’ to an improved lifetime utility which is not achievable when only credit is provided. Over time, as her savings increase, her incentive to repay increases. The optimal loan scheme is weakly progressive, i.e. weakly increasing over time. We also provide a sufficient condition for the non-existence of any incentive compatible contract.

Suggested Citation

  • Dyotona Dasgupta & Prabal Roy Chowdhury, 2022. "Simultaneous borrowing and saving in microfinance [Microfinance beyond group lending]," Oxford Economic Papers, Oxford University Press, vol. 74(3), pages 920-935.
    • Handle: RePEc:oup:oxecpp:v:74:y:2022:i:3:p:920-935.
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    File URL: http://hdl.handle.net/10.1093/oep/gpab062
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    Citations

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    Cited by:

    1. Dasgupta, Dyotona & Mookherjee, Dilip, 2023. "A theory of progressive lending," Games and Economic Behavior, Elsevier, vol. 137(C), pages 211-227.
    2. Hartarska, Valentina M. & Zhang, Jingfang & Nadolnyak, Denis A., 2023. "Scope Economies from Rural and Urban Microfinance Services," 2023 Annual Meeting, July 23-25, Washington D.C. 335439, Agricultural and Applied Economics Association.
    3. Valentina Hartarska & Jingfang Zhang & Denis A. Nadolnyak, 2023. "Scope economies from rural and urban microfinance services," Southern Economic Journal, John Wiley & Sons, vol. 89(4), pages 1138-1167, April.

    More about this item

    JEL classification:

    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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