Miri Stryjan on loan repayment flexibility and firm profits: experimental evidence from Uganda

Miri Stryjan will present at the WIDER Seminar Series on 22 June 2022.

Loan repayment flexibility and firm profits: Experimental evidence from Uganda

Abstract

We examine how key aspects of the most common form of financing – debt - may inhibit the expansion of small enterprises in developing countries. Growing a business entails learning and risk taking, as project returns to investment can start low but increase over time, or be uncertain. Credit and liquidity constrained entrepreneurs may also struggle to finance indivisible start-up costs. Meanwhile, standard debt contracts available for many poor micro-entrepreneurs stipulate a constant repayment stream and caps on the initial loan size. Therefore, backloaded returns, uncertain returns and high startup costs may not be sufficiently addressed by the standard loan contract. To shed light on the extent to which these theoretical constraints limit the effectiveness of micro-loans, we designed a randomized controlled trial where randomly chosen Ugandan firm owners, accepted for a loan, were offered amended contracts designed to alleviate one of these constraints by introducing different kinds of flexibility in the repayment schedule, or a bigger initial loan amount. Treated firms, as well as a control group, were followed over a period of 5 years. Initial results suggest that increased flexibility in loan repayment schedules leads to higher profits after 5 years, and that the optimal type of flexibility differs between male and female entrepreneurs. We do not find support for binding credit constraints.

About the speaker

Miri Stryjan is an Assistant Professor in the Economics Department at the Aalto University School of Business - Helsinki Graduate School of Economics.

She does research in development economics, political economics and applied microeconomics with a regional focus on East Africa. Most of her current research studies different aspects of finance in developing countries, including loan contract structure, selection into borrowing and the motivation of loan officers in microfinance, using experimental methods and field work.

Miri holds a PhD from the Institute for International Economic Studies (IIES), Stockholm University. Prior to her current position at Aalto, she was an Assistant professor at Ben-Gurion University of the Negev.

WIDER Seminar Series

The WIDER Seminar Series showcases the latest research on key topics in development economics. It provides a forum for for visiting scholars, UNU-WIDER researchers, external researchers, policymakers and industry specialists to present their research.

In addition to providing a forum for both academic debate and training, the series presents an opportunity for policymakers and others interested in development to learn about the latest research methods and findings.

The WIDER Seminar Series events take place on Wednesdays. All those interested are invited to register and attend via Zoom.