Examining Microcredit through the Behavioral Lens

Understanding microcredit lending models through behavioral economics

This note explores behavioral explanations that govern design intricacies of microcredit and also the anomalies in microcredit business models. It also explains how the intrinsic behavioral levers in the model synergize with the mental money management mechanisms of low-income clients. The note states that despite the exponential growth of the microcredit sector in the last thirty years, the sector is still seen as an ancillary to the regular financial sector. It suggests that as the microfinance industry moves ahead, it is important to take behavioral insights and build on them to re-define products, processes, and methodologies to incorporate the effects of human behavior, especially on how low-income people deal with different aspects of their lives, from managing finances to providing for their families. The note covers the following sections in detail:

  • Why microcredit works with a focus on group based lending methodology, loan repayment through highly frequent small installments, negligible moratorium or grace periods, and repeated borrowing cycles;
  • Demand side anomalies in microcredit models with a focus on multiple borrowing , over-indebtedness, and price indifference;
  • Supply side anomalies in microcredit models with a focus on mono credit culture and obsession with discipline.

About this Publication

By Singh, A., Mukherjee, P. , Tiwari, A.