How Does Contract Design Affect the Uptake of Microcredit Among the Rural poor? Experimental Evidence from the River Islands of Northern Bangladesh

Discussing how different microcredit contract designs affect borrowing among the ultra-poor

This paper attempts to fill the knowledge gap regarding the kind of microcredit contract likely to be suitable for extremely poor households, also called the ultra-poor. It is based on a field experiment in the river islands of northern Bangladesh, where a substantial portion of dwellers could be categorized as ultra-poor. For the study, four types of loans were offered to the dwellers: regular small cash-loans with one-year maturity, large cash loans with three-year maturity both with and without a one-year grace period, and in-kind livestock loans with three-year maturity and a one-year grace period. The study compares uptake rates as well as determinants of uptake for each loan type and finds that the uptake rate is the lowest for the regular contract, followed by the in-kind contract. The paper covers the following sections in detail:

  • Microcredit and its effects on poverty alleviation with a focus on demand side and supply side constraints on the provision of microcredit to the ultra-poor;
  • Study settings with a focus on study area, sampling strategy, and experimental design;
  • Summary statistics, estimation strategy, and conceptual framework;
  • Discussion of results with a focus on factors associated with individual and group rejection and heterogeneity analysis.

About this Publication

By Takahashi, K., Shonchoy, A., Ito, S. , Kurosaki, T.