Taken together, the results from these evaluations indicate that MFIs can improve upon the standard contract model that uses weekly repayment beginning shortly after disbursal.
Monthly repayments: Switching from weekly to monthly repayments did not affect the repayment rate. There was no difference in the default rate or the frequency of late payments between groups.
Two-month grace period: The grace period increased clients’ economic activity. Grace period clients invested Rs. 364.9 (roughly 6 percent) more in their businesses compared to regular clients and were twice as likely to start a new business. After three years, these clients reported weekly profits that were 57.1 percent higher than the comparison group mean of Rs. 1,587 per week and household incomes that were 19.5 percent higher than the comparison group mean of just over Rs 20,000 per week. Grace period clients also reported roughly 80 percent more business capital. However, grace period clients were more than three times more likely to default than regular clients, which is consistent with the theory that the grace period allows for riskier investments that, if successful, have a higher rate of return.
Monthly repayments with a focus on financial stress: Clients with monthly repayments were no more likely to default in the short term, and they scored 45 percent lower on an index of financial stress than clients with weekly repayments. Compared to weekly clients, monthly clients worried about repayment 51 percent less often, they were 54 percent less likely to lack confidence in their ability to repay, and were 60 percent less likely to spend significant time thinking about repayment. Monthly clients also reported investing more in their businesses and having higher income, which suggests that the flexibility encouraged more profitable investments.
These results suggest that the microfinance sector can gain by moving away from the traditional contract model. Switching to lower frequency repayment schedules could allow MFIs to save on the costs of repayment collection, with no added risk of default, while also reducing clients’ stress levels. Although offering a grace period before beginning repayment increased the default rate, it allowed entrepreneurs to make larger investments in their businesses, resulting in longer term economic gains. This is an area with large potential for further research, and the researchers are planning to conduct follow-up surveys to determine the long term effects of these contract modifications on participants’ business outcomes.