Can an interest-free credit facility be more efficient than a usurious payday loan?

Salleh, Murizah O.; Jaafar, Aziz; Ebrahim, Muhammed-Shahid

Abstract

Inefficiencies in mainstream credit markets have pushed selected households to frequent high cost payday loans for their liquidity needs. Ironically, despite the prohibitive cost there is still persistent demand for the product. This paper rides on the public policy objective of expanding affordable credit to rationed households. Here, we expound a simple model that integrates inexpensive interest-free liquidity facility within an endogenous leverage circuit. This builds on the technology of ROSCA/ASCRA/mutual/financial cooperative and cultural beliefs indoctrinated in Islam. Our results indicate the potential Pareto-efficiency of this interest-free circuit in contrast to the competing interest-bearing schemes of payday lenders and mainstream financiers.

Citation

Salleh, M. O., Jaafar, A., & Ebrahim, M. (2014). Can an interest-free credit facility be more efficient than a usurious payday loan?. Journal of Economic Behavior and Organization, 103, 74-92. https://doi.org/10.1016/j.jebo.2013.05.014

• Journal Article Type: Article
• Acceptance Date: May 29, 2013
• Online Publication Date: Jun 12, 2013
• Publication Date: Jul 1, 2014
• Deposit Date: Sep 22, 2014
• Publicly Available Date: Apr 20, 2015
• Journal: Journal of Economic Behavior and Organization
• Print ISSN: 0167-2681
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 103
• Pages: 74-92
• DOI: https://doi.org/10.1016/j.jebo.2013.05.014
• Keywords: Interest-free loan, Payday loan, Financial exclusion, Liquidity facility, Cooperatives.
• Public URL: https://durham-repository.worktribe.com/output/1453814