Dynamic Incentives and Microfinance Borrowers

Abstract

In recent years microfinance has been recognised as one of the policy mechanisms to achieve the goal of financial inclusion. Different lending models have been appropriated in microfinance sector to provide micro-loans to microfinance borrowers and their likely socio-economic impact on microfinance borrowers varies across different lending models. In case of microfinance, credit contracts between lenders and borrowers are designed in such a manner that borrowers’ initial loans are smaller but increases with each loan cycle over a period of time, termed as progressive lending.2 The present study using primary data collected from Mirzapur district in Uttar Pradesh attempts to explore the determinants/variables that explain progressive loan demand by microfinance borrowers in self-help groups (SHGs) and joint liability groups (JLGs). Using logit model, the paper concludes that in both SHGs and JLGs, longer association with microfinance groups helps in availing progressive loans from SHGs/microfinance institutions (MFIs) followed by loans procured from other sources also compel microfinance borrowers to demand larger loans from MFIs primarily for paying loan instalments. In addition to this income, size of group, number of dependents in household and asset endowment characteristics of SHG/JLG members also affect progressive loan demand by SHG/JLG members.