Flexible Micro-credit

Long Title:

The Impact of Micro-Credit Repayment Rules on Seasonal Migration and Loan Repayment during the Agricultural Lean Season – A Randomized Control Experiment in Bangladesh. (With Takashi Kurosaki and Tatsufumi Yamagata)


Seasonal migration due to agricultural lean season is a common phenomenon in developing countries, especially in Bangladesh. During such agricultural downturns, a large share of the labor force temporarily migrates to nearby urban areas for survival. After the shock’s effects abate, most people return to their villages. However, through strict weekly loan repayment rules, micro-credit institutions can hamper this process, reducing the ability of participating people to react to a shock. We combine a panel data survey with a randomized experiment to test the impact of relaxing these payment rules on seasonal migration, loan repayment and micro-credit participation rates.


The emergence of Micro-finance Institutions (MFIs) has been a recent policy development in poverty alleviation in developing countries. MFIs have improved the access of the poor and crated an alternative to informal credit market. However, the interactions and side-effects of this policy instrument have not been studied extensively yet, but this is of tremendous importance for their evaluation. Based on anecdotal and survey evidence, we find that micro-credit can actually hamper temporary migration during lean seasons, lowering the welfare of rural people. We are not aware that this problem has been studied appropriately in the literature, even though it has direct implications for development policy. This establishes the need, importance, and relevance of a comprehensive and methodologically sound study of the problem, such as we propose. Results from this project will help MFIs to optimize their credit schemes, and will help other interested parties including governmental institutions to either advocate a relaxation of micro-credit rules or to search for alternative policy instruments specially in the periods of agricultural lean periods.


Lean periods typically occur due to agriculture cycles when agricultural worker do not have any employability . If such periods occur in developing countries like Bangladesh, many people move from rural areas to nearby cities or towns for a short period of time in an attempt to maintain their living standards. Such temporary migration is an important livelihood strategy especially for poor rural people. As such lean periods are seasonal or temporary in nature, most individuals prefer a temporary over a permanent move giving them the opportunity to combine their village based existence with the urban work opportunities. Specifically in the face of village-based highly seasonal labour demand, villagers may see the temporary migration to urban areas as relatively practical and a rational strategy to cope with seasonal downturns and natural shocks. A reinforcing factor for the temporariness of migration is the reversal of the urban-rural wage differential that occurs during the peak labour demand season in the agricultural sector.

One recent policy development in developing countries has been the emergence of micro-credit institutions in poverty alleviation. It is argued that given access to (small) credits, entrepreneurs from poor households will find opportunities to engage in viable income-generating activities, often secondary to their primary occupation, and thus get rid of the poverty by their own. Micro-credit is accessible in rural areas through MFIs that have expanded quite rapidly in recent years. According to the Micro-credit Summit Campaign, as of December 2007 Micro-finance institutions had 154,825,825 clients of which more than 100 million were women. In 2006, Mohammad Yunus and the Grameen Bank were awarded the Nobel Prize for Peace for their contribution to the reduction of poverty, especially in Bangladesh. However, among academics there is so far no consensus on the impact of micro-credit on income improvement and poverty reduction (Banerjee et. al., 2009). On the one hand, various studies on the impact of micro-credit in developing countries have found evidence of consumption smoothing, asset building (Pitt and Khandker, 1998) and reduction of poverty (Khandker, 2005). Conversely, using the same data set of Pitt and Khandker (1998), Morduch (1999) found that the average impact of micro-finance is “non-existent”. Similarly, Navajas et. al. (2000) concluded that micro-credit is largely unsuccessful in reaching the poor and the vulnerable.

A major drawback of the micro-credit framework is the usually rigid loan repayment rule. Nearly all contracts are fixed in their repayment schedules which entail constant equal weekly payments with high interest rate. However, MFIs are dealing with poor rural people who most often have uncertain income, which makes it very difficult for them to maintain such rigid weekly loan repayments. Especially in the case of lean period, when there is no job available in the rural agricultural sector, it is very hard for the poor to generate income let alone comply with their loan repayment scheme. As discussed before, during lean periods many people choose to seasonally migrate to urban areas for survival. However, strict repayment schedules prevent people with prior access to micro-credit from migrating, and make it thus very difficult for them to repay the weekly installment of loan and keep a living.

Scholars and experts will unanimously agree with the fact that the provision of Micro-credit schemes has improved the access to the credit market for rural people. However, we need to know the possible loopholes and side-effects of such instruments, and ought to find ways to improve them. The results of this project will be of importance to both the poor credit takers and micro-finance institutions and the policy makers supporting them. If we find that a relaxation of repayment schemes yields improved welfare without higher risks on the side of MFIs, those institutions will revise their contracts to the benefit of the poor. If we find that risks are too high, then policy makers can either compensate MFIs for bearing those risks, or we can look for other ways to alleviate the interaction problems associated with temporary migration and being tied to a micro-credit. For example, government and donor agencies might want to focus more on capacity building of diverse, alternative skills among both agricultural and non-agricultural professionals, skills which help them to find a better livelihood strategy during lean seasons. 


We will test the interaction of micro-credit provision rules and temporary migration with a Longitudinal survey and a field experiment conducted in Northern Bangladesh. This region is a mainly agriculture-based, natural disaster prone and severely poverty-stricken area. Due to the agricultural cycle, after the plantation of “Aman” paddy from September to October, agricultural workers have very little work to do on farms. As a result, every year a large number of farm workers become jobless and decide to migrate temporarily. Such migrants tend to get work in the urban informal sector and mainly work as day laborers. Even though the urban standard of living is typically a bare minimum for these migrants, they prefer this option to staying in their village with no income at all. A second reason to choose Bangladesh for this study is the fact that the country has one of the largest Micro-credit sectors of the world with 1200 micro-credit institutions and 19.3 million members.

The project employs two established complementary empirical methods: a two-wave panel survey and a randomized field experiment.

Panel Household Survey : 72 villages, 20 households per village, total 1440 households [Survey Pictures]

 Base-line Survey 2011[pdf], Short Lean Period Survey 2011[pdf], Panel Survey 2012 [pdf], Repeat Lean Period Survey 2012 [pdf]

Randomized Field Experiment : Design of the RCT[pdf]

Treatment arms: 
Full Moratorium:  No repayment obligation during the lean period
Semi Moratorium: Only Month repayment during the lean period, any family member can repay the installment during the lean period.
Traditional: Typical micro-credit repayment, no consideration for lean period.
Control: No intervention, 


Banerjee, Abhijit V., and Esther Duflo (2008). The Experimental Approach to Development Economics. NBER Working Paper No. 14467.

Karlan, D. and Mullainathan, S. (2007). Is Microfinance Too Rigid? VoxEU December 2007.

Banerjee, A., Duflo, E., Glennerster, R., & Kinnan, C. (2009). The Miracle of Microfinance? Evidence from a Randomized Evaluation. J-PAL Working Paper.

Khandker, S. R. (2005). Microfinance and Poverty: Evidence Using Panel Data from Bangladesh. World Bank Economic Review 19(2), 263–286.

Morduch, J. (1999). The Microfinance Promise. Journal of Economic Literature 37(4), 1569–1614.

Navajas, S., Schreiner, M., Meyer, R. L., Gonzalez-Vega, C. and Rodriguez-Meza, J. (2000). Microcredit and the Poorest of the Poor: Theory and Evidence from Bolivia. World Development 28(2), 333–346.

Pitt, M. A. and Khandker, S. A. (1998). The Impact of Group-Based Credit Programs on Poor Households in Bangladesh: Does the Gender of Participants Matter? Journal of Political Economy 106(5), 958–996.