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August 16th, 2017

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

Published by Agricultural Economics,

This article in the journal Agricultural Economics 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. For the study a data set from a commercial microfinance institution in Madagascar is used. A propensity score matching is applied 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, the specifics of the regions where loans were disbursed are considered. The 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.

Curated from onlinelibrary.wiley.com