IDEAS home Printed from https://ideas.repec.org/p/pid/wpaper/2019166.html
   My bibliography  Save this paper

Choice of Microfinance Contracts and Repayment Rates under Individual Lending: An Artefactual Field Experiment from Pakistan

Author

Listed:
  • Shahid Razzaque

    (Pakistan Institute of Development Economics, Islamabad)

Abstract

An artefactual field experiment in a semi-rural town of district Sialkot, Pakistan was conducted using the randomly drawn subjects from the pool of potential microfinance borrowers in that area. Two different types of contracts were employed including a Non-Interest Based- Profit Sharing (PS) and a Conventional Interest Based (IB) contracts. The subjects were split into two groups where one had the option to choose from the set of available contracts while the other did not. Strong preference for PS contracts over IB contract had been observed, however the repayment rates did not differ significantly across the contracts. The female subjects showed a higher repayment rate than the male subjects. At the same time, the enforcement and penalty treatments and religiosity of the subject had a significant and positive effect on the repayment behaviour.

Suggested Citation

  • Shahid Razzaque, 2019. "Choice of Microfinance Contracts and Repayment Rates under Individual Lending: An Artefactual Field Experiment from Pakistan," PIDE-Working Papers 2019:166, Pakistan Institute of Development Economics.
    • Handle: RePEc:pid:wpaper:2019:166
    as

    Download full text from publisher

    File URL: https://www.pide.org.pk/pdf/Working%20Paper/WorkingPaper-166.pdf
    File Function: First Version, 2019
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. El-Gamal, M.A., 1997. "Can Islamic Banking Survive? A Micro-Evolutionary Perspective," Working papers 9705, Wisconsin Madison - Social Systems.
    2. Shahid Razzaque, 2018. "Effects of Peer Monitoring and Contract Choice on Repayment Rates Under Group Liability Lending: A Laboratory Microfinance Experiment From Australia," International Journal of Applied Behavioral Economics (IJABE), IGI Global, vol. 7(3), pages 1-33, July.
    3. Jonathan de Quidt & Thiemo Fetzer & Maitreesh Ghatak, 2018. "Market Structure and Borrower Welfare in Microfinance," Economic Journal, Royal Economic Society, vol. 128(610), pages 1019-1046, May.
    4. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
    5. Duncan Thomas, 1990. "Intra-Household Resource Allocation: An Inferential Approach," Journal of Human Resources, University of Wisconsin Press, vol. 25(4), pages 635-664.
    6. Al-Azzam, Moh'd & Carter Hill, R. & Sarangi, Sudipta, 2012. "Repayment performance in group lending: Evidence from Jordan," Journal of Development Economics, Elsevier, vol. 97(2), pages 404-414.
    7. Abhijit V. Banerjee & Esther Duflo, 2010. "Giving Credit Where It Is Due," Journal of Economic Perspectives, American Economic Association, vol. 24(3), pages 61-80, Summer.
    8. Rob Dixon & John Ritchie & Juliana Siwale, 2007. "Loan officers and loan ‘delinquency’ in Microfinance: A Zambian case," Accounting Forum, Taylor & Francis Journals, vol. 31(1), pages 47-71, March.
    9. Ghatak, Maitreesh & Guinnane, Timothy W., 1999. "The economics of lending with joint liability: theory and practice," Journal of Development Economics, Elsevier, vol. 60(1), pages 195-228, October.
    10. Lehner, Maria, 2009. "Group Lending versus Individual Lending in Microfinance," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 299, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    11. Joel M. Guttman, 2007. "Repayment Performance in Microcredit Programs: Theory and Evidence," NFI Working Papers 2007-WP-11, Indiana State University, Scott College of Business, Networks Financial Institute.
    12. Noland, Marcus, 2005. "Religion and economic performance," World Development, Elsevier, vol. 33(8), pages 1215-1232, August.
    13. Dilip Dutta & Ihab Magableh, 2006. "A socio-economic study of the borrowing process: the case of microentrepreneurs in Jordan," Applied Economics, Taylor & Francis Journals, vol. 38(14), pages 1627-1640.
    14. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
    15. El-Komi, Mohamed & Croson, Rachel, 2013. "Experiments in Islamic microfinance," Journal of Economic Behavior & Organization, Elsevier, vol. 95(C), pages 252-269.
    16. Simon Cornée & David Masclet, 2013. "Long-Term Relationships, Group lending and Peer Sanctioning in Microfinance: New Experimental Evidence," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 201316, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
    17. Giné, Xavier & Karlan, Dean S., 2014. "Group versus individual liability: Short and long term evidence from Philippine microcredit lending groups," Journal of Development Economics, Elsevier, vol. 107(C), pages 65-83.
    18. repec:dau:papers:123456789/1674 is not listed on IDEAS
    19. Sharma, Manohar & Zeller, Manfred, 1997. "Repayment performance in group-based credit programs in Bangladesh: An empirical analysis," World Development, Elsevier, vol. 25(10), pages 1731-1742, October.
    20. Arvind ASHTA & Rosita De SELVA, 2012. "Religious Practice and Microcredit: Literature Review and Research Directions (English version)," Postmodern Openings, Editura Lumen, Department of Economics, vol. 8, pages 33-44, January.
    21. Wydick, Bruce, 1999. "Can Social Cohesion Be Harnessed to Repair Market Failures? Evidence from Group Lending in Guatemala," Economic Journal, Royal Economic Society, vol. 109(457), pages 463-475, July.
    22. D'Espallier, Bert & Guérin, Isabelle & Mersland, Roy, 2011. "Women and Repayment in Microfinance: A Global Analysis," World Development, Elsevier, vol. 39(5), pages 758-772, May.
    23. Katherine Marshall & Lucy Keough, 2004. "Mind, Heart and Soul in the Fight Against Poverty," World Bank Publications - Books, The World Bank Group, number 14927, December.
    24. Van Tassel, Eric, 1999. "Group lending under asymmetric information," Journal of Development Economics, Elsevier, vol. 60(1), pages 3-25, October.
    25. Mersland, Roy & D’Espallier, Bert & Supphellen, Magne, 2013. "The Effects of Religion on Development Efforts: Evidence from the Microfinance Industry and a Research Agenda," World Development, Elsevier, vol. 41(C), pages 145-156.
    26. Giorgia Barboni & Alessandra Cassar & Arturo Rodriguez Trejo & Bruce Wydick, 2013. "Adverse Selection and Moral Hazard in Joint Liability Loan Contracts: Evidence from an Artefactual Field Experiment," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 9(2), pages 153-184, July.
    27. Jeffrey Carpenter & Tyler Williams, 2010. "Moral hazard, peer monitoring, and microcredit: field experimental evidence from Paraguay," Working Papers 10-6, Federal Reserve Bank of Boston.
    28. Jonathan de Quidt & Thiemo Fetzer & Maitreesh Ghatak, 2018. "Market Structure and Borrower Welfare in Microfinance," Economic Journal, Royal Economic Society, vol. 128(610), pages 1019-1046, May.
    29. Kumar Aniket, 2003. "Sequential Group Lending with Moral Hazard," Edinburgh School of Economics Discussion Paper Series 136, Edinburgh School of Economics, University of Edinburgh.
    30. Abhijit Banerjee & Esther Duflo & Rachel Glennerster & Cynthia Kinnan, 2015. "The Miracle of Microfinance? Evidence from a Randomized Evaluation," American Economic Journal: Applied Economics, American Economic Association, vol. 7(1), pages 22-53, January.
    31. Thomas, Duncan & Contreras, Dante & Frankerberg, Elizabeth, 2002. "Distribution of power within the household and child health," MPRA Paper 80075, University Library of Munich, Germany, revised Mar 2002.
    32. repec:dau:papers:123456789/5133 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chowdhury, Shyamal & Chowdhury, Prabal Roy & Sengupta, Kunal, 2014. "Sequential lending with dynamic joint liability in micro-finance," Journal of Development Economics, Elsevier, vol. 111(C), pages 167-180.
    2. Ahlin, Christian, 2015. "The role of group size in group lending," Journal of Development Economics, Elsevier, vol. 115(C), pages 140-155.
    3. Altınok, Ahmet & Sever, Can, 2014. "Efficient Microlending without Joint Liability," MPRA Paper 56598, University Library of Munich, Germany.
    4. Shyamal Chowdhury & Prabal Roy Chowdhury & Kunal Sengupta, 2014. "Sequential lending with dynamic joint liability in micro-finance," Discussion Papers 14-07, Indian Statistical Institute, Delhi.
    5. Al-Azzam, Moh’d & Parmeter, Christopher F. & Sarangi, Sudipta, 2020. "On the complex relationship between different aspects of social capital and group loan repayment," Economic Modelling, Elsevier, vol. 90(C), pages 92-107.
    6. Li Gan & Manuel A. Hernandez & Yanyan Liu, 2018. "Group Lending With Heterogeneous Types," Economic Inquiry, Western Economic Association International, vol. 56(2), pages 895-913, April.
    7. Mohamed, Toka S. & Elgammal, Mohammed M., 2023. "Credit risk in Islamic microfinance institutions: The role of women, groups, and rural borrowers," Emerging Markets Review, Elsevier, vol. 54(C).
    8. Joel M. Guttman, 2006. "Repayment Performance in Group Lending Programs: A Survey," NFI Working Papers 2006-WP-01, Indiana State University, Scott College of Business, Networks Financial Institute.
    9. Gutiérrez-Nieto, Begoña & Serrano-Cinca, Carlos, 2019. "20 years of research in microfinance: An information management approach," International Journal of Information Management, Elsevier, vol. 47(C), pages 183-197.
    10. Dorfleitner, Gregor & Oswald, Eva-Maria, 2016. "Repayment behavior in peer-to-peer microfinancing: Empirical evidence from Kiva," Review of Financial Economics, Elsevier, vol. 30(C), pages 45-59.
    11. Moh'd Al-Azzam & Maria Heracleous & Sudipta Sarangi, 2013. "Does the Group Leader Affect Repayment Performance Differently?," Southern Economic Journal, John Wiley & Sons, vol. 80(2), pages 502-522, October.
    12. Hameem Raees Chowdhury, 2016. "Joint-Liability in Microcredit: Evidence from Bangladesh," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 44(1), pages 105-129, March.
    13. Prabal Roy Chowdhury, 2006. "Group-lending with sequential financing, contingent renewal and social capital," Discussion Papers 06-01, Indian Statistical Institute, Delhi.
    14. Dean S. Karlan, 2005. "Social Capital and Group Banking," Working Papers 181, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
    15. Ahlin, Christian & Waters, Brian, 2016. "Dynamic microlending under adverse selection: Can it rival group lending?," Journal of Development Economics, Elsevier, vol. 121(C), pages 237-257.
    16. Prabal Roy Chowdhury, 2004. "Group-lending with sequential financing, joint liability and social capital," Discussion Papers 04-23, Indian Statistical Institute, Delhi.
    17. Emilios Galariotis & Christophe Villa & Nurmukhammad Yusupov, 2011. "Recent Advances in Lending to the Poor with Asymmetric Information," Journal of Development Studies, Taylor & Francis Journals, vol. 47(9), pages 1371-1390, July.
    18. Luminita Postelnicu & Niels Hermes & Ariane Szafarz, 2014. "Defining Social Collateral in Microfinance Group Lending," Palgrave Studies in Impact Finance, in: Roy Mersland & R. Øystein Strøm (ed.), Microfinance Institutions, chapter 10, pages 187-207, Palgrave Macmillan.
    19. Kumar Aniket, 2007. "Does Subsidising the Cost of Capital Help the Poorest? An Analysis of Saving Opportunities in Group Lending," Edinburgh School of Economics Discussion Paper Series 140, Edinburgh School of Economics, University of Edinburgh.
    20. Nyarko, Samuel Anokye, 2022. "Gender discrimination and lending to women: The moderating effect of an international founder," International Business Review, Elsevier, vol. 31(4).

    More about this item

    Keywords

    Microfinance; Individual Lending; Asymmetric Information; Interest-based contracts; Profit Sharing contracts;
    All these keywords.

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pid:wpaper:2019:166. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Khurram Iqbal (email available below). General contact details of provider: https://edirc.repec.org/data/pideipk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.