The paper describes innovative microfinance products that combine flexibility features with financial discipline. Those are microsavings, microcredit and microinsurance products and they come from microfinance institutions worldwide. This review shows that service providers are introducing various types of flexibility into financial contracts and that flexibility can be combined with a variety of disciplining mechanisms, such as direct screening and monitoring of clients, financial collateral, reputational incentives, and also psychological pressure. We notice, however, that product flexibility may raise the operational costs for the institutions and have a limited outreach.
I examine the use of flexible savings-and-loan accounts offered by SafeSave, a microfinance institution serving poor slum dwellers in Dhaka, Bangladesh. I find that 59% of the clients co-hold, meaning that they borrow at high interest rates and simultaneously hold low-yield liquid savings. Co-holders could immediately pay down, on average, 32 per cent of their debt using liquid savings and thus avoid significant interest payments. The results show that co-holders are more likely to be regular workers subject to little income uncertainty, suggesting that co-holding is not a consequence of liquidity needs. The paper discusses alternative explanations.
Keywords
Forthcoming in Journal of Development StudiesKey words: Liquidity, uncertainty, precautionary savings, microfinance, Bangladesh.
Using data from Bangladesh, this paper finds that the liquidity premiumthe difference between the interest paid on illiquid and liquid savings accounts-is higher in commercial banks than in microfinance institutions. One possible interpretation lies in the higher prevalence of timeinconsistency among the poor. The observed difference in liquidity premia could be due to poor time-inconsistent agents willing to forgo interest on illiquid savings accounts in order to discipline their future selves.
Forthcoming in Applied Economics Letters
AbstractUsing data from Bangladesh, this paper finds that the liquidity premium-the difference between the interest paid on illiquid and liquid savings accounts-is higher in commercial banks than in microfinance institutions. One possible interpretation lies in the higher prevalence of time-inconsistency among the poor. The observed difference in liquidity premia could be due to poor time-inconsistent agents willing to forgo interest on illiquid savings accounts in order to discipline their future selves.
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