Repayment Frequency and Repayment Performance in Microfinance

This paper explains why most microfinance institutions (MFIs) employ equal install-ment schedules rather than a single repayment one, which has been a puzzle for economic theorists. Equal installment contracts, however, pose a large financial burden on poor bor-rowers. The paper therefore investigates a flexible installment contract and establishes how the amount of each installment should be varied according to the interest rate, the proba-bility with which an economic shock arises, and the future discount rate of the borrower, among others. It is shown that under certain conditions both MFIs and borrowers are better off under the proposed flexible installment contract. JEL classification: O12; G2