Home / Summaries / Financial markets and corporate strategy / period-grace-paper

Paper1 classic microfinance bad for entrepreneurship? effects of grace period

4 important questions on Paper1 classic microfinance bad for entrepreneurship? effects of grace period

What was the aim of the paper?

Verify if classic microfinance model inhibits further entrepreneurship (high return illiquid investments). -Compare effects of classic microfinance model and alternative model with grace period. -Comparative results in short and long run (3 years)

Give two other possible effects of the grace period?

-More security to invest the whole loan in the business. -Lower default risk during low months. -Grace period encouraged experimental practices.

What are the findings on grace period in this paper?

Grace period leads to:
- more investments and entrepreneurship
- Higher profits and household incomes
- Short run: Clients with grace period 3 times more likely to default, since they are more likely to take risks (wider range of products, extend credit to customers)
long run: higher returns on investments

Mention some limitations of this paper

The authors state that an alternative measure of business profitability is total household income (p. 2210). Prior it is mentioned that roughly half of all household had at least one wage earner (p. 2203). In our honest opinion we believe that it could be rash to use household income as a measurement of business profitability (and therefore success)

In the paper it is mentioned that “grace period contracts may be poorly utilized by present biased clients” (Fisher and Ghatak, 2010). However, in the analysis there is no room for a measurement of present bias under borrowers

The question on the page originate from the summary of the following study material:

Financial markets and corporate strategy | 9780077129422 | David Hillier, et al

View summary