Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
883515 | Journal of Economic Behavior & Organization | 2014 | 19 Pages |
•This paper illustrates the viability of interest-free endogenous leveraged circuit.•We contrast the interest-free facility with usurious payday loans.•We demonstrate the former's efficiency using a net present value (NPV) analysis.
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.