Marianna Battaglia
Château Lafarge
Route des Milles
13290 Les Milles
Timothée Demont : timothee.demont[at]univ-amu.fr
Alice Fabre : alice.fabre[at]univ-amu.fr
We study how greater repayment flexibility in microfinance affects the pool of borrowers who select into borrowing as well as the growth of firms taking up the flexible contract. Using a cluster-randomized design, we track the borrowing decisions of a representative sample of microenterprises in treatment and control areas to study which types of firms become microfinance clients after the introduction of the new loan. We find that firms with less risk averse owners, those who had expressed an interest to start another business or hire more workers, and firms with higher productivity at baseline were more likely to become clients. Among the clients who were offered the new contract, those with lower risk aversion took up the flexible loan at a greater rate. Clients offered the flexible contract were also more likely to remain as clients and had higher business assets and revenues. Overall, our findings imply that introducing repayment flexibility can improve the effectiveness of microcredit in terms of firm growth as well as attract less risk averse and more productive clients, with a desire to undertake longer-term and riskier investments.