Determinants of Repayment in Microcredit: Evidence from Programs in the United States
This paper examines four of the oldest microcredit programs in the United States (US) - the Neighborhood Entrepreneurship Program (NEP) for mostly African-Americans, the Community Enterprise Program (CEP) for mostly Asians, the First Chance (FC) for mostly Latinos and The Womens Development Association (WDA) serving both Latino and African-Americans. All four programs adopted a credit disbursement technique, group-based lending, common in developing countries. The authors tested several variables hypothesized to be determinants of loan repayment, such as:
- Gender;
- Educational level;
- Household income;
- Proximity to lending agency;
- Transaction cost;
- Borrower-group homogeneity;
- Sanctions.
The authors state that higher levels of education and proximity to a lending agency increase chances of loan repayment of a borrower, while the gender of the borrower does not appear to affect the chances of repayment. Several contextual factors that are conducive to higher chances of repayment include:
- Low transaction cost;
- Communities with high social capital;
- Borrowers engaged in income generating activities.
The authors conclude that to be viable, while designing, the US lending programs must take into consideration the similarities and differences from similar programs in the developing countries. The agencies should consider adoption of strategies such as:
- Identifying potential borrowers who have ability to develop viable businesses;
- Providing only specific training;
- Being close to clients;
- Adopting effective mechanisms against loan default.
