Can flexible agricultural microfinance loans limit the repayment risk of low diversified farmers?

Abstract

Using a unique data set from a commercial microfinance institution in Madagascar, this article investigates the credit risk of microfinance loans with flexible repayment schedules for crop farmers. Flexible repayment schedules allow a redistribution of principal payments during periods with low agricultural returns to periods when agricultural returns are high through predefined grace periods. We apply propensity score matching to investigate how different numbers of grace periods reflecting different levels of production diversification affect the credit risk of crop farmers. In this attempt, three delinquency categories reflecting various levels of credit risk are assessed. Moreover, we consider the specifics of the regions where loans were disbursed. Our results reveal that loans with predefined grace periods show significantly higher delinquencies. This effect is significant over all three delinquency categories for loans disbursed to low diversified crop farmers. For the more diversified farmers, this effect is only significant for the lowest delinquency category. Hence, predefined grace periods might bridge periods with low agricultural returns but come at the cost of higher credit risk for the lender. The magnitude of these effects is, however, small. JEL classifications: G21, G32, Q14

Innovative Financial Approach for Agricultural Sustainability: A Case Study of Alibaba

“…Financial attractiveness is the bargaining power of focal companies toward financial institutions when seeking to improve the financial performance of their upstream/downstream supply chain [55]. Recent literature has confirmed that it is the ability of microfinance institutions to provide desired loan amounts to small users [70]. As financial solutions in this context are not merely financially oriented, financial attractiveness is divided into that toward cooperative institutions and that toward customers in this research.…”

“…Second, Jiebei allows flexible repayment condition and loan amounts. The flexible repayment condition is the main reason why Microloans are an advantage [70]. Farmers usually only need short-term and small loans, for example, a one-thousand-yuan loan for 20 days.…”

Flexible loans and access to agricultural credit for smallholder farmers in Kenya

“…Flexible loans are loans whose transactions can be reconciled with the cash flows of a borrower (Collins et al, 2009). For farmers, flexible loans allow repayments to be redistributed during periods of low returns to periods of high returns by offering predefined grace periods Weber and Musshoff (2017). Theoretically, the link between flexibility and access to credit is captured by a conceptual framework that posits that there will be a higher demand for loans when there is flexibility as farmers will appreciate that flexibility eases repayment.…”

“…Microfinance institutions are some of the formal financial providers that have adopted flexible terms of lending in order to attract farmers to take up loans. However, only a few MFIs offer flexible loan contracts worldwide because they are considered risky (Labie et al, 2017;Weber and Musshoff, 2017). Field and Pande (2008) disagree with the view that flexible loans are risky, as they note that flexibility may actually lead to higher repayment rates.…”

“…Field and Pande (2008) disagree with the view that flexible loans are risky, as they note that flexibility may actually lead to higher repayment rates. Other authors have shown that financial institutions can use a number of strategies to ameliorate risks such as volume rationing (Weber and Musshoff, 2017), pricing (Barboni, 2017) and other disciplining mechanisms (Laureti and Hamp, 2011).…”