Theme 1: MFI’s clients borrowing strategies and lending groups financial heterogeneity under progressive lending: Evidence from rural Mexico
The objective of the paper is to address a central issue related to theoretical foundations of microfinance lending: do borrowers necessarily borrow the maximum amount they are allowed along credit replications? Actually, economic theories generally assume that borrowers of microfinance institutions are credit constrained which suggests that dynamic incentives according to which borrowers repay their loan in order to access a larger loan may be powerful.
Based on 1507 individual observations covering the borrowing history of 91 lending groups attended by two rural branches of a microfinance institution in Southern Mexico, the first stage of the analysis that addresses borrowers’ borrowing strategies shows that along credit replication borrowers tend to request loans which are small relative to those that such microfinance institution is willing to lend to them. We then look at potential facts that could explain why borrowers are unwilling to obtain the maximum amount of loans that they could possibly obtain: income generation through the use microcredit and access to other sources of income are successively addressed. Our results suggest that the loans are generally not invested in pursuit of an immediate return. Moreover our results cannot support the idea of any negative influence either of any other sources of income or of any external negative choc on income.
A group-level analysis shows that groups are heterogeneous in that some participant borrowers request larger loans than others. Here, our qualitative analysis also reveals that an apparent homogeneity of group members’ borrowing strategies can hide heterogeneity as long as the heterogeneity is managed with intra- group members’ loans. Through intra-group transactions this financial needs heterogeneity may lead to an increase in moral hazard and may also decrease the repayment performance of the group. Our study finally suggests that access to future loan is a better incentive than progressive lending.
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