Publication details for Professor Muhammed-Shahid EbrahimSalleh, Murizah O., Jaafar, Aziz & Ebrahim, Muhammed-Shahid (2014). Can an interest-free credit facility be more efficient than a usurious payday loan? Journal of Economic Behavior and Organization 103(Supplement): 74-92.
- Publication type: Journal Article
- ISSN/ISBN: 0167-2681
- DOI: 10.1016/j.jebo.2013.05.014
- Keywords: Interest-free loan, Payday loan, Financial exclusion, Liquidity facility, Cooperatives.
- Further publication details on publisher web site
- Durham Research Online (DRO) - may include full text
Author(s) from Durham
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.