Willingness to Pay for Debt Flexibility
Microfinance institutions assume low-income borrowers will not accept higher interest rates to obtain flexible repayment terms, limiting product innovation and contract differentiation.
Picture this
Just as airline passengers are willing to pay a higher price for a flexible ticket that allows changing travel dates without penalties, small business owners are willing to pay a higher interest rate for a loan that gives them time to build business profits before making their first payment.
What the evidence says
40.0% of existing microfinance clients were willing to pay an interest rate of 17.5% APR or higher for a grace period contract, and 30.8% of non-clients expressed willingness to pay above the MFI break-even threshold of 38.0% APR.
- Who
- 769 microfinance clients and 13 non-client candidate micro-entrepreneurs in Kolkata, India.
- How
- Hypothetical willingness-to-pay survey protocol with progressively increasing interest rate differentials between regular and grace period contracts.
What to do
Survey client willingness to pay across varying interest rate premiums before dismissing flexible credit products as commercially unviable.
From the source
"Forty percent of clients are willing to pay an interest rate of 17.5 percent or higher for the grace period (no client is willing to pay more than 59 percent)."
101_290 microfinance and entrepreneurship AER2013.pdf