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

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

doi:10.1016/j.jebo.2013.05.014

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

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

Authors

Murizah O. Salleh

Aziz Jaafar

Professor Muhammed Ebrahim m.s.ebrahim@durham.ac.uk
Professor

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

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Copyright Statement
NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Economic Behavior & Organization. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Economic Behavior & Organization, 103, Supplement, July 2014, 10.1016/j.jebo.2013.05.014.