Entrepreneurs in developing countries face a number of constraints that limit their growth and therefore their contribution to employment and long-term economic development.

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Expanding access to business credit is a goal shared by microfinance practitioners, policymakers, and donors alike. However, there is less of a consensus when it comes to expanding access to consumer credit. Even as microfinance institutions increasingly move beyond entrepreneurial credit and offer consumer loans, practitioners and policymakers continue to voice their concern for “unproductive” lending.

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How sensitive are borrowers to higher interest rates? We worked with a South African lender to randomize both the interest rate offered to clients by a direct mail solicitation, and the maturity of an example loan shown on the offer letter.

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The study investigates whether borrowers' choices can be manipulated by frames, cues, and other features that change the presentation of the choice, but not its actual content or inherent value. IPA partnered with a consumer lender in South Africa to identify which psychological features of a mass-mailing advertising campaign are the most effective. Showing a photo of an attractive woman increased demand for the loan by the same amount as a 25% reduction in the monthly interest rate.

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In credit markets, borrowers have better information about themselves than lenders. Lenders do not have full knowledge of the prospects of the investment activities for which the funds are borrowed, nor of the likelihood of default. This asymmetry of information may lead to a higher risk of default or make lenders hesitant to offer credit. Researchers sought to understand different types of information asymmetries and how they relate to loan default rates in South Africa.
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The microcredit model, in which individuals are liable to a group, has been tremendously successful in extending credit to the extreme poor. Yet individuals may also be able to select creditworthy peers and hold them accountable to repay their loans. In South Africa, researchers evaluated whether people have enough information to identify reliable borrowers among their peers and if they can help enforce loan repayment.

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