Optimizing Loan Contracting and Marketing Stategies Using Field Experimentation

Managers of microfinance institutions (MFIs) typically lack the information required to optimize loan contract terms and marketing strategies. We outline a replicable randomized-control methodology that addresses MFI contracting and marketing strategies directly, and we present evidence from the first implementation of this methodology. We estimate consumer loan demand sensitivities with respect to interest rates, maturity, and the marketing presentation of loan options. We estimate repayment sensitivity with respect to price, and find uniquely clean evidence of specific market failures: adverse selection and moral hazard. We also measure how changes in MFI contracting and marketing strategy affects the social mission of microfinance programs by altering the demographic composition of clients. The clients in this particular study were very sensitive to maturity increases, certain marketing presentations, and price increases. They were less sensitive to price decreases. The findings suggest that MFIs may have more success balancing profitability and outreach by changing maturities and marketing content than by changing interest rates. But our results are merely suggestive. Our primary contribution is developing a replicable, cost-effective methodology, and we have additional research underway that will help shed light on optimal strategies in other markets. More research is needed and feasible. * Contact information: [email protected] and [email protected]. Thanks to Nate Goldberg for research assistance, and to the Lender for financing the loans and providing us the data from the experiment. We are grateful to the National Science Foundation (SES-0424067 and CAREER SES0547898), BASIS/USAID (CRSP), and the Federal Reserve Bank of New York for funding research expenses. The views expressed are those of the authors and do not necessarily represent those of any of the funders or related organizations.