Willingness to Pay for Debt Flexibility

In Simple Words

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.

Research question

Microfinance institutions assume low-income borrowers will not accept higher interest rates to obtain flexible repayment terms, limiting product innovation and contract differentiation.

Participants

769 microfinance clients and 13 non-client candidate micro-entrepreneurs in Kolkata, India.

Study Design

Hypothetical willingness-to-pay survey protocol with progressively increasing interest rate differentials between regular and grace period contracts.

Results

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.

Takeaway

Survey client willingness to pay across varying interest rate premiums before dismissing flexible credit products as commercially unviable.

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