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Should Flexibility Matter? A Poor Consumer’s Perspective of Flexible Micro Loans

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  • Rahul Kumar Sett

Abstract

Repayment schedules characterizing a typical micro loan are rigid and offer little to no flexibility in terms of rescheduling repayments when faced with emerging contingencies. Such rigid structures affect the economic as well as the psychological well-being of the poor leading to underinvestment of the borrowed capital, lower motivational levels and lowered sense of psychological well-being among the underprivileged. Flexibility in loan contracts and repayment schedules can alleviate these adverse effects on the poor and bring the microfinance institutions closer to their goal of poverty alleviation and welfare objectives. In this article, a case is made in favour of flexible loan contracts and repayment schedules based on the psychological underpinnings of decision making among the underprivileged. Implications of such loan contracts on consumer welfare and the microfinance institutions (MFIs) are discussed.

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  • Rahul Kumar Sett, 2015. "Should Flexibility Matter? A Poor Consumer’s Perspective of Flexible Micro Loans," IIM Kozhikode Society & Management Review, , vol. 4(2), pages 166-169, July.
    • Handle: RePEc:sae:iimkoz:v:4:y:2015:i:2:p:166-169
    DOI: 10.1177/2277975215607261
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    References listed on IDEAS

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    1. Erica Field & Rohini Pande & John Papp & Y Jeanette Park, 2012. "Repayment Flexibility Can Reduce Financial Stress: A Randomized Control Trial with Microfinance Clients in India," PLOS ONE, Public Library of Science, vol. 7(9), pages 1-7, September.
    2. Boucher, Stephen R. & Guirkinger, Catherine, 2007. "AJAE Appendix: Risk, Wealth and Sectoral Choice in Rural Credit Markets," American Journal of Agricultural Economics APPENDICES, Agricultural and Applied Economics Association, vol. 89(4), pages 1-4, November.
    3. Shonchoy, Abu S. & Kurosaki, Takashi, 2014. "Impact of seasonality-adjusted flexible microcredit on repayment and food consumption : experimental evidence from rural Bangladesh," IDE Discussion Papers 460, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    4. Drazen Prelec & George Loewenstein, 1998. "The Red and the Black: Mental Accounting of Savings and Debt," Marketing Science, INFORMS, vol. 17(1), pages 4-28.
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