Should Flexibility Matter? A Poor Consumer’s Perspective of Flexible Micro Loans

Abstract

Repayment schedules characterizing a typical micro loan are rigid and offer little to no flexibility in terms of rescheduling repayments when faced with emerging contingencies. Such rigid structures affect the economic as well as the psychological well-being of the poor leading to underinvestment of the borrowed capital, lower motivational levels and lowered sense of psychological well-being among the underprivileged. Flexibility in loan contracts and repayment schedules can alleviate these adverse effects on the poor and bring the microfinance institutions closer to their goal of poverty alleviation and welfare objectives. In this article, a case is made in favour of flexible loan contracts and repayment schedules based on the psychological underpinnings of decision making among the underprivileged. Implications of such loan contracts on consumer welfare and the microfinance institutions (MFIs) are discussed.