Policy recommendations

  • Relaxing some aspects of the traditional microfinance model, targeting microcredit products better, and lending for activities beyond entrepreneurial activities can lead to substantial welfare gains.
  • Some simple changes to the contract design for loans – in particular, products providing more flexible capital and loosening the credit constraint – can effectively boost the entrepreneurial capacity of poor clients.
  • Policymakers should use existing economic links within communities to identify productive borrowers and better target microfinance products. Institutions could incentivise local intermediaries to cooperate, while ensuring checks and balances to prevent them from exploiting the borrowers.
  • Policymakers should encourage the use of microcredit for a broader variety of purposes, such as supporting borrowers to migrate, find jobs, or smooth consumption during lean seasons.
  • Policymakers should encourage loan durations to be extended to match crop cycles and shift focus from group to individual liability. The savings in administrative costs eliminating meeting requirements would allow lenders to charge substantially lower interest rates.