Classic Grameen Repayment Model
The classic Grameen microfinance model requires loan repayments to begin almost immediately (e.g., two weeks post-disbursement) to minimize lender risk and enforce discipline. However, this immediate repayment demand restricts borrowers from investing in high-return, illiquid business opportunities.
Picture this
Imagine borrowing money to start a bakery that takes a month to install an oven and sell its first loaf of bread, but the bank demands its first weekly payment after seven days. To keep from defaulting, an entrepreneur is forced to spend part of the loan buying pre-made store cookies to resell immediately at zero profit, instead of spending the whole loan on the oven that would yield high profits later.
What the evidence says
Borrowers under the classic model invested 6.0% less of their loan in business capital (Rs 6,142 vs Rs 6,526), had 41.0% lower weekly profits three years later (Rs 1,579 vs Rs 2,220 top-coded), and were nearly three times less likely to start new businesses (2.0% vs 4.6%).
- Who
- 845 female microfinance clients organized into 169 five-member groups in urban Kolkata, India.
- How
- Randomized Controlled Trial comparing a classic contract requiring repayment starting 2 weeks post-disbursement against a 2-month grace period contract.
What to do
Redesign traditional microfinance products away from rigid fortnightly repayment schedules starting immediately after disbursement when financing micro-entrepreneurs with gestation-heavy business opportunities.
From the source
"Early initiation of repayment is widely considered an important means by which the classic 'Grameen model' limits lending risk."
101_290 microfinance and entrepreneurship AER2013.pdf