Strategic default,multiple installments,and the role of informal moneylender in microcredit contract |
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Authors: | Khan Jahirul Islam |
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Institution: | Department of Economics, Philosophy, & Political Science, The University of British Columbia, Kelowna, British Columbia, Canada |
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Abstract: | I model the role of strategic defaults and informal moneylenders on multiple-installment loan contracts offered by microfinance institutions (MFIs). The results show that a single-installment loan is not viable due to MFIs' vulnerability to strategic defaults and borrowers' lack of collateral. In contrast, a multiple-installment contract requires borrowers to borrow from the moneylender, who is immune to strategic default, in order to repay the MFI's early installments that are due before the project yields a return. Consequently, both default costs and borrowing costs increase and incentives to commit strategic default decline, making the multiple-installment contract profitable for MFIs. |
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Keywords: | microcredit moneylenders multiple installment strategic default |
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