Research to update the classic microfinance contract
Since its inception in the 1970s, microfinance has been viewed as an important tool to support the livelihoods of poor people who lack access to traditional banking services. In recent years, however, rigorous research has raised questions about the extent to which these small, collateral-free loans can reduce poverty. The growing body of evidence has also highlighted that the traditional microloan contract may be unnecessarily rigid, constraining (rather than enabling) business investments by borrowers, particularly women.
Small adjustments to microfinance contracts, such as increasing repayment flexibility and facilitating social interaction among borrowing group members, can significantly enhance microfinance impacts.
To explore these issues further, the team at Inclusion Economics at Yale University – with researchers from Duke University, Harvard University, Princeton University, the University of Illinois at Chicago, and the Rice Institute – collaborated with the Centre for Microfinance on a series of experiments in India to provide insights on how microfinance can be refined to strengthen its beneficial impacts for the world’s poorest entrepreneurs. Among a range of other findings, this research has shown that traditional microfinance contracts can be tailored to heighten poor borrowers’ benefits from access to credit. Currently, the team is analyzing how flexible microfinance contracts for poor entrepreneurs can also create benefits that spill over to the next generation, improving child outcomes in the long run.
