The impact of the classical microfinance contract on the poor entrepreneur : a field experiment on entrepreneurs in Tanzania

Abstract

This master thesis studies the impact of the classical repayment contract in microfinance, and whether the contract is constraining the investment behavior of the poor entrepreneur. To illuminate how the repayment contract is affecting the short-run investment behavior and further the long-run business outcome of the poor entrepreneur, we use data from a randomized field experiment in Tanzania. In addition, we present a literature review on the dynamics of the repayment contract and recent empirical research on the effect of a more flexible repayment contract on the microfinance institution and the poor entrepreneur. Our study indicates a change of short-run investment behavior by the treatment group, as well as an increase in the long-run business outcomes for the males in the treatment group. These results illuminates that a less strict repayment contract could change the investment behavior of the clients as well as their long-run business outcomes.