Flexible Credit for Microentrepreneurs

Last registered on August 24, 2017

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Pre-Trial

Trial Information

General Information

Title

Flexible Credit for Microentrepreneurs

RCT ID

AEARCTR-0001123

Initial registration date

June 28, 2016

Initial registration date is when the trial was registered.

It corresponds to when the registration was submitted to the Registry to be reviewed for publication.

First published

June 28, 2016, 2:04 PM EDT

First published corresponds to when the trial was first made public on the Registry after being reviewed.

Last updated

August 24, 2017, 5:19 PM EDT

Last updated is the most recent time when changes to the trial's registration were published.

Locations

Country

Colombia

Region

Atlantico, Bolivar and Cundinamarca

Primary Investigator

Name

Dean Karlan

Affiliation

Northwestern University

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Other Primary Investigator(s)

PI Name

Lasse Brune

PI Affiliation

Northwestern University

Contact Investigator

PI Name

Xavier Giné

PI Affiliation

World Bank

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Additional Trial Information

Status

On going

Start date

2015-10-01

End date

2018-10-30

Keywords

Finance & Microfinance

Additional Keywords

Repayment Flexibility, Financial Innovation

JEL code(s)

D14, G21, O16

Secondary IDs

Abstract

The income flows of micro and small business owners in developing countries are usually quite irregular and hard to predict. Microloans by microfinance institutions (MFIs) from around the developing world generally follow very rigid repayment schedules beginning immediately after the loan disbursement. Such repayment structures are unfit to support investments in technology or other solutions to expand the business, as these generally take longer to pay off. Additionally, these repayment structure does not match well with the seasonal and unpredictable income streams typical of microenterprises.

This project aims to contribute to current microfinance research and practices, through the design and testing of the viability and impact of improved loan products, which include flexibility in the repayment plan. Our study’s primary objective is to help microfinance institutions improve their financial products to better address the needs of their clients.

In this study, we will work with Kiva and Fundacion Mario Santo Domingo (FMSD) to design a flexible loan product and test it rigorously through an RCT. The flexible loan will allow clients to adjust their repayment plans within pre-defined limits, so that clients will be able to cope with unexpected shocks to their household or business income, and invest their loans more productively.

External Link(s)

Registration Citation

Citation

Brune, Lasse, Xavier Giné and Dean Karlan. 2017. "Flexible Credit for Microentrepreneurs." AEA RCT Registry. August 24. https://doi.org/10.1257/rct.1123-2.0

Former Citation

Brune, Lasse, Xavier Giné and Dean Karlan. 2017. "Flexible Credit for Microentrepreneurs." AEA RCT Registry. August 24. https://www.socialscienceregistry.org/trials/1123/history/20772

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Experimental Details

Interventions

Intervention(s)

We will work with Kiva and Fundacion Mario Santo Domingo (FMSD) to offer improved loan products to a subset of the MFI clients. The improved loans will include pre-defined and limited flexibility in the loan repayment plan. So that clients will be able to adapt the repayment of their loan to the cycles of their businesses and other expected or unexpected events.

Fundacion Mario Santo Domingo will carry out a marketing campaign in which potential clients will be offered either standard or flexible loans. During the marketing campaign, a group of promoters will explain the characteristics of the loans offered by Fundacion Mario Santo Domingo to potential clients. In the case of a flexible credit offer, the promoters will include an explanation of the functioning of this innovative loan. After hearing all the characteristics of the loan, the clients will be offered the option of getting inscribed to request a loan from the MFI.

Intervention Start Date

2015-10-01

Intervention End Date

2018-10-30

Primary Outcomes

Primary Outcomes (end points)

Take up analysis:
1- Decision to formally apply for a loan
2- Decision to take up a loan

Selection analysis:
1- Pre-loan characteristic of the borrowers
+ Outcomes of the following subsection

Product analysis conditional on selection:
1- Investments of the borrowers
2- Usage of loan
3- Repayment behavior
4- Business activity
5- Stress levels
6- Capacity to face negative shocks

Primary Outcomes (explanation)

Secondary Outcomes

Secondary Outcomes (end points)

Secondary Outcomes (explanation)

Experimental Design

We will randomly offer standard loans or flexible loans to primary borrowers of the partner MFI, using a two-stage randomization strategy.

Experimental Design Details

We will randomly offer standard loans or flexible loans to primary borrowers of the partner MFI, using a two-stage randomization strategy.

We will work with the partner MFI, Fundacion Mario Santo Domingo (FMSD), to conduct a marketing campaign for approximately 10,000 micro-entrepreneurs. From this marketing campaign, we expect to get approximately 3,000 clients.

The randomization process will be as follows:

First randomization: Each potential borrower will be randomly assigned to one of the following two offers:
* Standard Loan Offer - Potential clients will be offered a standard (rigid) individual loan.
* Flexible Loan Offer - Potential clients will be offered a flexible individual loan.

Second randomization: On this stage, a randomly assigned set of clients that received a standard (rigid) loan is subsequently offered more advantageous conditions (flexible loan) compared to the initial offer.

Then, we will end up with three treatment groups, that will be compared to each other in different analyses:
A. Standard loan offer - Standard loan contract
B. Standard loan offer - Flexible loan contract
C. Flexible loan offer - Flexible loan contract

Take-Up Analysis Sample /Administrative Data from Partner Organization:
Our sample is all those clients that were offered a credit. We are interested in seeing the take-up rate differences among the different products, if any. Therefore, we compare those that were offered a standard loan (A&B) to those that were offered a flexible loan (C).

Self-Selection to Flexibility Analysis Sample / Panel Survey Data and Administrative Data from Partner Organization:
Our sample is those clients that ended up with a flexible credit (B&C). We compare those that were offered the flexible product from the beginning (C) to those for which the offer was improved after accepting the credit (B). We measure the effects of selection. In essence, this is a test about the borrower. Are there profitable entrepreneurs that will only borrow when the loan product is flexible?

Product Design Analysis Sample / Panel Survey Data and Administrative Data from Partner Organization:
Our sample is those clients that initially were offered a standard product (A&B). We compare those that ended up with a standard product (A) to those that ended up with a flexible credit (B), controlling for selection since all borrowers agreed to take-up a standard loan. This is a test about the product.

Randomization Method

Randomization will be done in two stages: at time of loan offer and after loan approval. Both randomization processes will be pre-programmed in cellphones using SurveyCTO (a data collection tool).

The first randomization will be materialized by both promoters and credit officers when doing loan offers to potential clients. The second randomization will be done by the credit officer during the credit committee and after the loans are approved.

Randomization Unit

Individual

Was the treatment clustered?

Experiment Characteristics

Sample size: planned number of clusters

Take up analysis: approximatively 10,000 potential borrowers
Selection and product analysis: approximatively 3,000 borrowers

Sample size: planned number of observations

Take up analysis: approximatively 10,000 potential borrowers Selection and product analysis: approximatively 3,000 borrowers

Sample size (or number of clusters) by treatment arms

Take up analysis - Treatment groups: approximatively 10,000 potential borrowers
1- Flexible Offer = approximatively 2,500 potential borrowers
2- Standard Offer = approximatively 7,500 potential borrowers

Adverse selection and product analysis - Treatment groups: approximatively 3,000 borrowers

A. Standard loan offer - Standard loan contract = 1,125 borrowers
B. Standard loan offer - Flexible loan contract = 1,125 borrowers
C. Flexible loan offer - Flexible loan contract = 750 borrowers

Minimum detectable effect size for main outcomes (accounting for sample design and clustering)

Supporting Documents and Materials

IRB