How does contract design affect the uptake of microcredit among the ultra-poor? : experimental evidence from the river islands of Northern Bangladesh

Despite the professed claims of microcredit alleviating poverty, little is known about what kind of credit contract is suitable for extremely poor households, also called the ultra-poor. To fill this knowledge gap, we initiated a field experiment in the river islands of northern Bangladesh, where a substantial portion of dwellers could be categorized as ultra-poor due to cyclic floods. We randomly offered four types of loans to such dwellers: regular small cash loans with one-year maturity, large cash loans with three-year maturity both with and without a one-year grace period, and in-kind livestock loans with three-year maturity and a one-year grace period. We compared uptake rates as well as the determinants of uptake and found that the uptake rate is the lowest for the regular contract, followed by the in-kind contract. Contrary to prior belief, we also found that the microcredit demand by the ultra-poor is not necessarily small, and in particular the ultra-poor are significantly more likely to join a microcredit program than the moderately poor if a grace period with longer maturity is attached to a large amount of credit, irrespective of whether the credit is provided in cash or in kind. This paper provides evidence that a typical microcredit contract with one-year maturity and without a grace period is not attractive to the ultra-poor. Microfinance institutions may need to design better credit contracts to address the poor's needs.

Quasi-experimental evidence on the drivers of index-based livestock insurance demand in Southern Ethiopia

Microinsurance is widely considered an important tool for sustainable poverty reduction, especially in the face of increasing climate risk. Although index-based microinsurance, which should be free from the classical incentive problems, has attracted considerable attention, uptake rates have generally been weak in low-income rural communities. We explore the purchase patterns of index-based livestock insurance in southern Ethiopia, focusing in particular on the role of accurate product comprehension and price, including the prospective impact of temporary discount coupons on subsequent period demand due to price anchoring effects. We find that randomly distributed learning kits contribute to improving subjects' knowledge of the products; however, we do not find strong evidence that the improved knowledge per se induces greater uptake. We also find that reduced price due to randomly distributed discount coupons has an immediate, positive impact on uptake, without dampening subsequent period demand due to reference-dependence associated with price anchoring effects.