Does the Classic Microfinance Model Discourage Entrepreneurship Among the Poor? Experimental Evidence from India

Pande, Rohini; Papp, John; Field, Erica; Rigol, Natalia (2013)


Pande, Rohini, John Papp, Erica Field, and Natalia Rigol. 2013. “Does The Classic Microfinance Model Discourage Entrepreneurship Among The Poor? Experimental Evidence From India”. American Economic Review October 2013 103 (6): 2196-2226.
Do the repayment requirements of the classic microfinance contract inhibit investment in high-return but illiquid business opportunities among the poor? Using a field experiment, we compare the classic contract which requires that repayment begin immediately after loan disbursement to a contract that includes a two-month grace period. The provision of a grace period increased short-run business investment and long-run prots but also default rates. The results, thus, indicate that debt contracts that require early re-payment discourage illiquid risky investment and thereby limit the potential impact of microfinance on micro enterprise growth and household poverty.