Compulsory versus voluntary savings as an incentive mechanism in microfinance programs
Résumé
This paper investigates the incentive mechanism of individual microlending contracts focusing particularly
on microsavings. We built a model to show the role of compulsory and voluntary microsavings
in addressing problems of information asymmetries. Our results are twofold. First, we show that
compulsory savings creates incentive conditions required for allowing micro-entrepreneurs to be
financed by a Microfinance institution. Second, we show that voluntary savings can serve as a
complementary tool to repayment enforcement at the same time inducing borrowers to reveal abilities
of their projects.
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