Three essays on microcredit and payday lending
Loading...
Date
2017
Authors
Islam, Khan
Journal Title
Journal ISSN
Volume Title
Publisher
Abstract
The three essays on microcredit and payday lending in this dissertation contribute to the existing literature on financial exclusion by addressing some burning questions.
The first essay investigates and compares the observable characteristics of the payday loans and microcredit borrowers. We examine three nationwide surveys in Canada that contain information on payday lending and a household level field survey on the use of microcredit in Bangladesh. Using simple probit and instrumental variable probit models, we find household income, wealth, the region of residence, age and education of the household head as key determinants of both payday loan and microcredit borrowing. Financial knowledge is found as a significant determinant of payday loan borrowing. Our findings suggest that countries can benefit from each other by adapting, modifying regulatory policies and improving the level of financial knowledge.
The second essay examines the linkages between the high frequency of installments of microcredit loans, and the very high repayment rate and the existence of informal moneylenders in the market. Our developed model shows that the poor borrower has strong incentives and opportunities to commit voluntary default at different time periods of the contract, which along with a low level of collateral, make the single installment repayment contract infeasible for microcredit lenders. The multiple-instalment loan leads the borrower to borrow from the third party because installments are due before project yields. This reduces the incentive to default and raises the microcredit repayment rate.
In the third essay, we analyze the macroeconomic and distributional effects of microcredit programs across 21 countries using a general equilibrium approach. We developed a model of financial intermediation and occupational choice to find out the impact of microcredit on five macroeconomic aggregates - average capital per worker, wealth inequality, the lending interest rate, income per capita and entrepreneurship. Our findings show that the macroeconomic and distributional impact of microcredit, subsidized microcredit and high-frequency of installments of microcredit loan significantly varies both in magnitudes and in directions across countries. Findings suggest designing country-specific microcredit contracts rather than using a typical contract in all countries.
Description
Keywords
Microcredit, Payday Loan