Rigidity in Microfinancing: Can One Size Fit All?

Introducing flexibility in microfinance
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This article highlights the need for flexibility in microfinance. It identifies problems inherent in the standard microfinance model, suggests options for flexible lending and points out challenges to implementing flexibility.

The article studies standard microfinance models and describes how innovative changes to the model can increase flexibility and improve quality of services. It discusses how lack of flexibility has limited the outreach of microfinance. The article illustrates how different elements of flexibility can be implemented in the current structure of microfinance. Examples include:

  • Pre-building flexibility into the contract by specifying periods when clients can repay smaller amounts;
  • Pre-specifying a number of low payment periods but not their timing;
  • Making borrowers eligible to smaller second loans at any point in the loan cycle.

The article states that randomized evaluations of flexible lending contracts can prove the potential of flexible microfinance to reach more clients at lower costs. It observes that rigorous evaluations will be crucial as new technologies are developed to improve to efficiency and scale of microfinance.

About this Publication

By Karlan, D. & Mullainathan, S.