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How far can we go? Determining the optimal loan size in progressive lending
Author(s) -
Dhib Nahla,
Ashta Arvind
Publication year - 2021
Publication title -
strategic change
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.527
H-Index - 16
eISSN - 1099-1697
pISSN - 1086-1718
DOI - 10.1002/jsc.2432
Subject(s) - loan , microfinance , financial inclusion , interest rate , productivity , business , economics , cash , financial institution , subsistence agriculture , actuarial science , monetary economics , finance , financial services , macroeconomics , economic growth , ecology , biology , agriculture
For microfinance institutions (MFIs) with double bottom line objectives and trade‐offs, the optimal loan size can be determined by using a combination of Markovian Chains with transition probabilities and expected cash flows. Progressive lending may be safe over a range of loan sizes, beyond which a rational borrower would indulge in a strategic default. This range of safe loan sizes may depend on borrower characteristics (risk‐taking, self‐confidence, productivity, interest rates, subsistence needs) and the Microfinance Institution's strategy (financial inclusion objective, progressive lending). MFIs can improve the objective functions by better communication and encouragement of borrowers to increase their confidence in each stage and reassuring them that entrepreneurial failure will not mean being denied a second chance.