Progressive Lending in Microfinance—What about the Farmers?

Abstract

AbstractDynamic incentives have become a common measure in microfinance institutions (MFI) to counteract the risk of default and to strengthen the borrower's identification with his micro‐lender. This article focuses on progressive lending over the course of the bank–borrower relationship. As the agricultural sector is increasingly important for Azerbaijan's economy, this study differentiates between the lending policies faced by farmers and non‐farmers, and matches the findings with the repayment performances of both client groups. By means of a rich data set spanning from 2007 through 2012 provided by an MFI in Azerbaijan, it can be demonstrated that farmers face a higher degree of loan volume rationing that cannot be justified by our findings on repayment performances. Moreover, we find that repeated borrowing increases the default probabilities of both client groups. In conclusion, we deduce that the MFI and borrowers could benefit from reconsidering the current lending policies.