While there is a fierce debate in the microfinance literature about the need for and the feasibility of more flexible repayment contracts, little evidence exists. In this paper, we study repayment and delinquency in a flexible repayment contract for solar panel home systems in Tanzania. Using a large administrative dataset on repayment and borrower characteristics, we study payment patterns and investigate how low income borrowers use the flexibility that the loan contract provides and its implication for default.
We find that people make use of the flexibility by adjusting their payments according to their income streams and available consumption smoothing resources. While the flexibility would thus allow borrowers to cope with sudden income shocks, we find supporting evidence that – as theory suggest - the lack of a rigid repayment schedule increases the likelihood of default for borrowers with time inconsistent preferences. Our analysis helps to inform policy makers and practitioners to design adequate loan products that are aligned to the cash flow variations inherent to many low-income people in developing countries, while not corrupting payment discipline.