Give Me a Pass: Flexible Credit for Entrepreneurs in Colombia

Although microcredit has reached millions, recent randomised evaluations find limited average business impacts. Contract rigidity, specifically the fixed and frequent instalments, may restrict moral hazard but limit productive risk-taking, thus limiting the impact. With a Colombian lender, we experimentally compared, for a sample of new borrowers, a standard rigid loan to a more flexible loan that included three “passes” with which borrowers could delay repayments. The flexible loan led to some shifts in investment behavior but had no average impact on revenue, profit level, or profit variance, and led to higher default.