Repayment under Flexible Loan Contracts: Evidence based on High Frequency Data

Grohmann, Antonia; Lenel, Friederike; Herbold, Steffen

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Repayment under Flexible Loan Contracts: Evidence based on High Frequency Data

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Grohmann, Antonia
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Lenel, Friederike
Potsdam Institute for Climate Impact Research;

Herbold, Steffen
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Grohmann, A., Lenel, F., Herbold, S. (in press): Repayment under Flexible Loan Contracts: Evidence based on High Frequency Data. - Economica.

Cite as: https://publications.pik-potsdam.de/pubman/item/item_32554

Abstract

We study repayment in the context of an alternative financial product that enables the purchase of a large asset—a solar panel home system—while offering complete repayment flexibility. Using a large administrative data set on daily repayment of 38,400 borrowers in Tanzania over 5.5 years, we perform unsupervised pattern analysis to classify repayment behavior. We show that borrowers with fluctuating incomes make more use of the loan’s flexibility and adjust their repayment to cash flow. In further analysis, we show that in particular farmers use the flexibility provided by the loan contract to adjust to seasonal fluctuations and to deal with unexpected shocks. Our results indicate that low-income households can finance large assets through innovative financial approaches that allow aligning payments to financial circumstances.