alternative sources of credit for the borrowers, it has the advantage of
testing borrowers with smaller loans before they can access larger ones,
thus limiting potential losses due to moral hazard.
(iv) Regular repayment schedules : Frequent regular loan repayment
schedules, such as weekly repayments, enable the lender to detect
defaulting borrowers early and take corrective actions before the
situation worsens. For microfinance institutions focused on lending for
seasonal agricultural production, however, this mechanism cannot
usually be employed due to the nature of the income streams from these
projects.
Credit Rationing
More in-depth analysis of the incentive issues that occur in the market for
borrowed funds has shown that credit markets are an instance in which the pricing
mechanism - interest rates - cannot efficiently allocate funds. Stiglitz and Weiss (1981)
show that even in equilibrium, the loanable funds market may be characterized by credit
rationing. They provide a model for explaining credit rationing that is different from the
traditional ‘price stickiness’ theory.
Formally, credit rationing is defined as the circumstance when, among loan
applicants who appear identical, some receive a loan while others do not; and the rejected
applicants do not receive a loan even if they offer to pay higher interest rates. “Criterion
a rationing occurs when, among observationally identical borrowers, some get loans and
others do not, and the rationed borrowers cannot get credit at any interest rate. A second
type of credit rationing (criterion b rationing) occurs when entire types cannot get credit
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