Innovations in the repayment structure of microcredit contracts

Abstract

Microfinance contracts typically require a fixed repayment schedule that, while ensuring repayment discipline, may inhibit entrepreneurship and business growth. In this article, I review the recent developments in the literature studying innovations in the repayment structure of microcredit contracts. Introducing flexible repayment schedules improves business outcomes by allowing microcredit borrowers to increase investment and to respond to income fluctuations to a higher extent. Although financial innovations hold the promise to foster business growth, and evidence suggests that their demand appears concentrated among financially sophisticated borrowers, they are feared to increase credit risk and hence their adoption among microfinance institutions is very limited. I explore potential challenges lenders face in offering these innovations and outline pathways towards a profitable implementation of such contracts.