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Discussion Paper Details

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Title: Learning and Microlending

Author(s): Mikhail Drugov and Rocco Macchiavello

Publication Date: October 2008

Keyword(s): Credit Constraints, Group Lending, Microlending Schemes, Savings, Scaling-Up and Self-Discovery

Programme Area(s): Development Economics and Financial Economics

Abstract: For many self-employed poor in the developing world, entrepreneurship involves experimenting with new technologies and learning about oneself. This paper explores the (positive and normative) implications of learning for the practice of lending to the poor. The optimal lending contract rationalizes several common aspects of microlending schemes, such as "mandatory saving requirements", "progressive lending" and "group funds". Joint liability contracts are, however, not necessarily optimal. Among the poorest borrowers the model predicts excessively high retention rates, the contemporaneous holding of borrowing and savings at unfavorable interest rates as well as the failure to undertake profitable and easily available investment opportunities, such as accepting larger loans to scale-up business. Further testable predictions can be used to interpret and guide the design of controlled field experiments to evaluate microlending schemes.

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Bibliographic Reference

Drugov, M and Macchiavello, R. 2008. 'Learning and Microlending'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7011