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.