2.1 RCT Strategy
(1) Inflexible Microcredit as the Control
A typical Grameen-style microcredit scheme proceeds as follows (Armendariz and Morduch 2010): individuals eligible for microcredit first form a group wherein its members are expected to help each other in times of difficulty. Not all members can borrow immediately. It is usually the case that only some of them are offered credit after all members have saved a small amount of money on a regular basis; the rest of them are given credit after the first borrowers successfully repay several installments and all members have continued to save the same small amount on a regular basis. Weekly repayments begin without a long grace period. With typical Grameen-type microcredit, the first lent amount is small, and it is to be repaid in 50 weekly installments within a 12-month period.
Several rationales have been offered for this rigidly designed repayment schedule (Armendariz and Morduch 2010). The success of frequent repayment in minimizing default and delay could be attributed to the early warning mechanism, the lender’s capture of information vis-à-vis the income flow of the borrower, and the borrower’s commitment to save regularly. Repayment in group meetings in front of others also drives regular repayment by those borrowers who would like to maintain their reputation within the village.
Probably on account of these mechanisms, classic Grameen-type microcredit has been successful in maintaining high repayment rates. However, attending weekly meetings regularly puts a high burden on the borrowers in terms of the opportunity costs of their time and financial stress (Field et al. 2012). Relaxing several of the classic Grameen-type features is thus being demanded from borrowers. Academic research has responded to this request, to identify the key element that was the most critically important in guaranteeing high repayment rates. For example, using a field experiment approach, Giné and Karlan (2011) evaluate the impact of removing group liability in the Philippines; they find there was no adverse impact on repayment, as long as public and frequent repayment systems were maintained. On the other hand, recent studies comparing weekly versus monthly installments and based on RCT designs show mixed results. In India, Field and Pande (2008) show no difference between microfinance schemes with weekly and monthly repayment frequencies, as long as repayments were made in public meetings. The same RCT also shows that the change from weekly to monthly repayment greatly reduced borrowers’ financial stress (Field et al. 2012). In contrast, in Indonesia, Feigenberg et al. (2011) find that repayment performance was better when repayments were collected weekly rather than monthly.
Given this background, we adopted the following borrowing and repayment scheme as the control. Borrowers obtain credit of BDT 3,000 and begin repayment after a short, two-week grace period. Repayments are made in 45 installments, each of which is BDT 75 (except for the last one, which is BDT 60), implying a gross interest payment of BDT 360 that is spread throughout the borrowing period of approximately one year. Each of the weekly installments is to be repaid by the borrower at a weekly meeting. The borrower is obliged to attend the weekly meeting, even during the monga period. This design of a traditional or inflexible microcredit scheme is denoted as the “Control.”
(2) Flexible Microcredit as the Treatment
During the monga period, microcredit borrowers may face difficulties in preparing the money needed for regular repayment. To facilitate the demand for repayment flexibility within this context, the treatment relaxes the repayment schedule in two ways during the monga period, which for this purpose is designated as September 20–December 20.
Under the first treatment, “Flexible 1,” a moratorium is temporarily applied to repayments during the designated monga period. During that moratorium, households within the Flexible 1 groups do not pay any installment. After the monga period, the borrowers begin to pay BDT 100 per week, so that their total repayment amount and repayment period would be identical to those of the Control group.
Under the second flexibility treatment, the repayment schedule is changed to feature three monthly installments of BDT 300 each during the designated monga period, instead of 12 weekly repayments of BDT 75 each. After the monga period, borrowers resume paying BDT 75 per week, so that their total repayment amount and repayment period would be the same as those of the control group. We refer to this treatment as “Flexible 2.” This treatment arm provides less flexibility than Flexible 1 (in terms of loan repayment obligation), while it provides better loan collection discipline than Flexible 1.
(3) Randomization of Treatment Arms
To preclude unequal treatment among members within a group, we randomized the four treatment statuses at the borrower-group level. Since our counterpart NGO usually forms one group in one village, our randomization took place at the village level.
Of the list of 90 villages that were under potential treatment by the counterpart NGO, we randomly selected 12 villages for “Control,” 36 for “Flexible 1,” and 24 for “Flexible 2.” In the randomization, we stratified the villages based on their distance from the closest bus station and the location type of the village.
In each village, our counterpart NGO formed a borrower group known as samity, which comprised 20 members who satisfied the NGO’s microcredit criteria and had voiced an interest in receiving microcredit. The member names were then recorded in the samity formation book by the loan officers. In the book, each samity member was assigned a number in ascending order; the members who happened to hold numbers 1–15 were to be offered credit, while those holding numbers 16–20 were kept in the group as observers. This design of randomization was not known to the samity members before the announcement of the treatments. This randomization thus implies the following sample distribution: there are 72 sample villages and 1,440 sample households, one-sixth or one-third of which falls into one of the four treatment arm categories; three-fourths of the sample households (1,080 households) were actual borrowers of microcredit.