Mithila Vijay

To what extent can the flexibility of a microloan contract impact the success of a borrower?

Started Dec. 16, 2021

Abstract or project description

The rise of microfinance institutions (MFIs) over the last 20 years has created an industry of lenders who specifically lend to those who are most financially vulnerable and needy in society. The Grameen Bank model, in Bangladesh, pioneered the group lending system where lenders provide smaller loans to individuals who lack access to the typical requirements of a loan from a commercial bank (Yunnus 1999). These requirements include access to a bank, a credit history, a viable income, etcetera. Since many of those who live in poverty lack these things, providing them with smaller loans on a good-faith basis allows many individuals to escape the constraints of a poverty trap. Microfinance involves providing credit and savings services to individuals who are attempting to run a small business (Khandker 2005). In this paper, I propose that prospective MFIs should consider providing a more flexible structure of loans. Section one is a review of the literature available, regarding microfinance, and the flexibility in microfinance specifically. Section two is a small summary of the research methodology. Section three is a summary of the findings. This begins with a review of various kinds of flexible loan products, and then a discussion of disciplining methods within these innovative products. The next part is a theory of implementation, with a framework for how the MFI can choose a product, based on the clients they aim to serve. Section four discusses limitations of the research and addresses potential counterarguments or challenges to the framework that I have proposed.