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Remembering to Pay? Reminders vs. Financial Incentives for Loan Payments

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  • Ximena Cadena
  • Antoinette Schoar

Abstract

We report the results from a field experiment with a micro lender in Uganda to test the effectiveness of privately implemented incentives for loan repayment. Using a randomized control trial we measure the impact of three different treatments: Borrowers are either given a lump sum cash reward upon completion of the loan (equivalent to a 25% interest rate reduction on the current loan), a 25% reduction of the interest rate in the next loan the borrower takes from the bank, or a monthly text message reminder before the loan payment is due (SMS). We find that on average the size of the treatment effect is similar across all the treatment groups: borrowers in the treatment groups have a 7-9% increase in the probability of paying on time and the average days late drop by 2 days a month. The results suggest that simple text messages which help borrowers to better manage their repayment dates have similar effects as large changes in the cost of capital of 25% of interest. The impact of the cash back incentives are stronger for customers with smaller loans and less banking experience, the reduced future interest rate seemed to be most effective for customers with larger loans, while the SMS text messages were particularly effective for younger customers.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17020.

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Date of creation: May 2011
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Handle: RePEc:nbr:nberwo:17020

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  1. Suresh de Mel & David McKenzie & Christopher Woodruff, 2008. "Returns to Capital in Microenterprises: Evidence from a Field Experiment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 123(4), pages 1329-1372, November.
  2. Kast, Felipe & Meier, Stephan & Pomeranz, Dina, 2012. "Under-Savers Anonymous: Evidence on Self-Help Groups and Peer Pressure as a Savings Commitment Device," IZA Discussion Papers 6311, Institute for the Study of Labor (IZA).
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Cited by:
  1. Melanie Morten & Dean Karlan & Jonathan Zinman, 2012. "A Personal Touch: Text Messaging for Loan Repayment," Working Papers, Economic Growth Center, Yale University 1011, Economic Growth Center, Yale University.
  2. Kast, Felipe & Meier, Stephan & Pomeranz, Dina, 2012. "Under-Savers Anonymous: Evidence on Self-Help Groups and Peer Pressure as a Savings Commitment Device," IZA Discussion Papers 6311, Institute for the Study of Labor (IZA).
  3. James J. Choi & Emily Haisley & Jennifer Kurkoski & Cade Massey, 2012. "Small Cues Change Savings Choices," NBER Working Papers 17843, National Bureau of Economic Research, Inc.
  4. John Beshears & James J. Choi & David Laibson & Brigitte C. Madrian, 2013. "Who Uses the Roth 401(k), and How Do They Use It?," NBER Working Papers 19193, National Bureau of Economic Research, Inc.
  5. Keith M Marzilli Ericson, 2014. "On the Interaction of Memory and Procrastination: Implications for Reminders," NBER Working Papers 20381, National Bureau of Economic Research, Inc.
  6. Michael Hamp & Carolina Laureti, 2011. "Balancing flexibility and discipline in microfinance: Innovative financial products that benefit clients and service providers," Working Papers CEB, ULB -- Universite Libre de Bruxelles 11-044, ULB -- Universite Libre de Bruxelles.

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