Introduction

This paper analyzes microcredit repayment decisions of a sample of individuals to whom 'Provident México' (hereafter Provident), a formal microfinance institution (MFI) based in Puebla (Mexico), had granted a simple door-to-door personal loan. Specifically, the objective of this research is to examine the hypothesis that cognitive characteristics as well as personality traits and preferences play a role in microcredit repayment behavior. This hypothesis is based on recent personality and cognition theories, and the relevance of its examination is to gain understanding on the determinants of vulnerable individuals’ microcredit repayment behavior for the sake of the well-being of individuals per se and of the sustainability of MFIs.

MFIs represent the only source of access to formal credit for many individuals in vulnerable socioeconomic conditions around the world (^{Armendáriz de Aghion and Murdoch, 2010}). Despite its importance, evidence of the impact of microfinance on poverty reduction in developing countries has been inconclusive (^{Hermes and Lensink, 2011}). Only recently evaluations of microfinance programs using the randomized-controlled-trials (RCT) approach have been undertaken. The RCT methodology is widely used in development economics for its identification advantage, and it has received important recognition with the awarding of the Nobel Prize in Economics in 2019 to Abhijit Banerjee, Esther Duflo, and Michael Kremer for using this approach with the objective of alleviating poverty, including the design and evaluation of several microfinance initiatives. Evidence has been reported that there are interventions where it is observed that microfinance enhances consumption smoothing and expenditure in durable goods (^{Banerjee et al., 2015}), and investment in income-generating activities (^{Augsburg et al., 2015}; ^{Crépon et al., 2015}). Besides the good news, we have studies that report cases in which microcredits do not show to have significative impacts on poverty relief (^{Angelucci et al, 2015}; ^{Attanasio et al., 2015}).

On the other hand, lending to the poor is costly due to elevated transaction and information costs, which contributes to the high interest rates that MFIs charge their clients, and MFIs must ensure an appropriate repayment rate to be sustainable (^{Bauer et al., 2012}; ^{Nawai and Shariff, 2012}; ^{Baklouti, 2013}; ^{Van den Berg et al., 2015}). However, problems such as excessive professionalization of MFIs and distancing from the original joint-liability loan format; clients’ over-indebtedness and its stressful consequences; and repayment problems (^{Attanasio, et al., 2015}; ^{Banerjee et al., 2015}), have cast a negative light on microfinance as a vehicle for poverty alleviation.

The microfinance sector in Mexico began operating in the decade of the 50’s with the creation of Sociedad de Cooperativas de Ahorro y Crédito (Savings and Credit Cooperatives Society), and since then this sector has experienced significant growth. Even though the interest rates that Mexican MFIs charge their clients have shown a decreasing trend in recent years, they are still higher than those charged by MFIs in other Latin American countries. The reason seems to lie in the small average size of microcredits which implies that MFIs in Mexico face high operation costs and lack of efficiency in resource management (^{Cotler, 2013}; ^{Aldasoro, 2017}). As pointed out by ^{Griffin and Husted (2015)}, the sustainability of an MFI depends on its repayment rate, and, given that most of MFIs operating in Mexico offer group-base-lending, factors such as social sanctions are of relevance when explaining repayment. However, as mentioned above, Provident offers personal loans and as of 2014, around 70% of its clients have shown delays in their payments. So, it is reasonable to think that repayment of this type of microcredit is more dependent on personal characteristics than with social issues. The novel aspect of this research is the expansion of the set of personal characteristics, based on recent contributions to the economic literature that will be reviewed in the next section, that might play an important role in timely microcredit repayment.

A survey applied to a random sample of clients of Provident, and information provided by Provident on the microcredit repayment status of this sample of clients are the sources of the dataset analyzed in this paper. The results obtained from the econometric exercise performed here indicate that older individuals possessing higher levels of grit and with a tendency toward short term present bias are more likely to not have delays in microcredit repayments. Cognitive characteristics results are inversely related to timely debt repayment. Unexpectedly, refinancing incentives do not play a key role on timely microcredit repayment is played, but this result is consistent with our finding that individuals in this sample that do not have delays in repayment are characterized by showing a short term bias. It is worth observing that most of the studies related to this article, that will be reviewed in the next section, analyze financial decision-making in developed economies, whereas this study is focused on microfinance repayment behavior in a developing economy. Hence, this article’s main contribution to the literature is the addition of personality and cognitive measures to the study of the microcredit repayment behavior in a developing economy.

The rest of this paper is organized as follows. The next section presents a review of the relevant literature with the purpose of laying out a conceptual framework to justify the empirical model to be estimated. In the third section, the empirical methodology and analysis of the unit are described. In the fourth section, descriptive statistics of the sample are presented. The formalization of the empirical model and the econometric results are presented in the fifth section. Finally, in the last section, conclusions are outlined and discussed.

1. Literature review

This article is related to several strands of the economic literature. First, it contributes to the microcredits’ repayment literature, in which a general but not undisputed agreement exists that sociodemographic characteristics are important factors in explaining repayment behavior. Education and income have been shown to be positively correlated to good microfinance repayment behavior (^{Bhatt and Tang, 2002}; ^{Nawai and Shariff, 2012}). The evidence on gender has been mixed: some studies find no significant relationship between gender and repayment (^{D’Espallier et al., 2011}), while others find that women, in general, are a better credit risk for MFIs (^{Armendáriz and Murdoch, 2010}).

Second, this study analyzes the importance of refinancing incentives in repayment drawn by studies in microfinance. A group of studies have demonstrated that the structure of the microfinance contracts plays a role in repayment behavior. Without explicit incentives -- such as group liability or the use of non‐refinancing threats -- borrowers tend to be at least late on their repayment schedule (^{Bauer et al. 2012}; ^{Nawai and Shariff, 2012}; ^{Baklouti, 2013}). After evaluating several microfinance experiences around the world, ^{Armendáriz De Aghion and Murdoch (2000)} emphasize several mechanisms that help guarantee timely individual credit repayment behaviors and avert some of the lateness endemic in the microloan market. Said mechanisms include the implementation of non-financial services, direct monitoring, regular payment programs, and threats of non-refinancing that serve as dynamic incentives.

Third, this work relates to studies that have shown the importance of including cognitive characteristics when explaining individual behaviors. The effect that cognitive characteristics have on a variety of economic and social outcomes has been well documented (^{Almlund et al., 2011}; ^{Borghans et al., 2011}). An expanding body of work has found that higher levels of cognitive abilities positively affect financial habits in different ways: lower probability of default, fewer financial errors, and greater sophistication in the use of financial products (^{Christelis et al., 2010}; ^{McArdle et al., 2011}; ^{Grinblatt et al., 2011}; ^{Agarwal and Mazumder, 2013}; ^{Cole and Shastry, 2014}). These works primarily suggest that cognitive abilities - and, of these, numerical abilities in particular - are strongly related to making appropriate financial decisions. In addition, there has been evidence of a positive relationship between cognitive abilities and financial literacy, defined by ^{Lusardi and Mitchell (2014)} as “people’s ability to process economic information and make informed decisions about financial planning, wealth accumulation, debt, and pensions.”

Fourth, this article brings together elements of recent studies that have analyzed the role of personality traits in socioeconomic behaviors. Psychologists have sketched a relatively commonly accepted taxonomy of personality traits known as the ‘Big Five’: Openness to Experience, Conscientiousness, Extroversion, Agreeableness and Neuroticism. ^{Borghans et al. (2011)}, ^{Almlund et al. (2011)}, and ^{Heckman and Kautz (2012)} reviewed evidence which indicates that these personality traits are as powerful as cognitive abilities in predicting socioeconomic behaviors, and that they are more malleable than cognitive characteristics over the life cycle.

A group of pioneering studies has studied the relationship between personality traits and financial behaviors. Some of these suggest that the presence of a certain sub-facet related to Conscientiousness - named grit or diligence -- can explain wealth accumulation (^{Ameriks et al., 2003}); financial distress (^{McCarthy, 2011}); indebtedness and default frequency (^{Klinger et al., 2013 a}, ^b); good management of finances (^{Kaufmann, 2012}); investment biases (^{Jamshidinavid et al., 2012}); and savings (^{Kausel et al., 2016}; ^{Roa et al., 2019}). In general, grit is considered a measure of both the propensity to plan and perseverance. Concerning microfinance, ^{Klinger et al. (2013 a, b)} shows that Conscientiousness and Intelligence have a predictive power similar to that of the usual metrics for evaluating loan repayment, such as credit bureau data, while Honesty relates to willingness to repay a loan. In addition, these authors found that Extroversion is strongly related to high profits, while Agreeableness (positive), Conscientiousness (negative) and Integrity (negative) are weakly related. Some of these results are surprisingly stable across a variety of countries, cultures and types of business.

Five risk and time preferences have been recognized by economists to play a central role in financial decisions. In the case of credit behavior, ^{Meier and Sprenger (2010)} find that individuals who are present-biased show a higher probability of having credit card debts. Regarding microfinance repayment behavior, there is evidence that non-refinancing threats along with regular payment schedules can help minimize problems of lack of self-control and present-biased preferences (^{Bauer et al., 2012}; ^{Basu, 2016}).

Given the concepts and theoretical frameworks that have been explained in the previous paragraphs, the objective at this point is to propose an empirical model to explain the relationship between the probability that an individual repays a microcredit on time (dependent variable) and the following explanatory variables: (i) refinancing incentives: the expectation is that having more than one microcredit with the institution will have a positive effect on the probability of microcredit repayment; (ii) sociodemographic characteristics: it is expected that being a woman, having higher income and educational level, and being older will positively impact the microcredit repayment probability; (iii) conscientiousness (grit), and time and risk preferences: it is important to clarify that the assumption that has been made here, as in several other related studies (^{Almlund et al., 2011}), is that personality characteristics and preferences are complements in explaining several economic behaviors, so they are included as independent explanatory variables. That said, it is expected that being grittier, more patient, and more risk averse all have a positive relationship with the repayment probability; and finally, (iv) cognitive characteristics and financial literacy: higher measured levels of cognitive ability and of financial literacy are expected to be positively related to the microcredit repayment probability.

In the next section, the fundamentals of the empirical methodology employed in this article, i.e., the construction of the measures of grit, cognitive ability and preferences, and the unit of analysis, will be explained.

2. Methodology and Unit of Analysis

3. Descriptive Statistics

As a first approach to the possible link among credit repayment and the variables of interest, some patterns are outlined here. A more detailed description of these patterns can be found in the On-line Appendix 2. Here are some highlights that can be drawn from analyzing those descriptive statistics:

4. Econometric Analysis and Results

5. Discussion and Conclusions

The main findings of the paper are as follows. First, a grittier, more present-biased, and older individual is less likely to delay their loan repayments. That older individuals repay on time is expected. The grit result is in line with related literature that highlights the key role of conscientiousness and its sub-facets in desirable economic and financial decision-making (^{Eskreis-Winkler et al., 2014}). Despite having only recently been integrated within the literature on financial decision-making, personality traits seem to constitute a key element in explaining financial behaviors, as they do in other social and economic behaviors. For future research, we plan to extend our analysis and questionnaire to the Big Five and lower-label facets of each one, in order to obtain a more comprehensive view on the role of personality traits in financial decisions.

The time preference result is also consistent with related literature in the sense that there is evidence that people who have microcredits tend to be present-biased (^{Meier and Sprenger, 2010}; ^{Bauer et al., 2012}). However, a temporal inconsistency known as hyperbolic discounting (^{Laibson, 1997}) is observed here: the individuals who belong to the Current group are present-biased in the short-term while more patient in the medium term. Besides this, as contradictory as it might seem, we believe that a more diligent and present-biased individual in the short-term has higher probability of a timely credit repayment. This finding supports the idea that personality traits and time preferences play a complementary role in explaining individuals’ life outcomes (^{Almlund et al., 2011}; ^{Becker et al., 2012}; ^{Rustichini et al., 2012}). While the possible relationship between preferences and personality traits is beyond the scope of this paper, it should be explored in future research.

The second main finding of this paper is that cognitive ability, while statistically significant, does not explain the probability of belonging to the Current group. Contrary to what we had expected, the lower an individual’s cognitive ability, the likelier they are to be in the Current group. This result is also at odds with prevailing ideas in the literature on the subject (^{Christelis et al., 2010}; ^{McArdle et al., 2011}; ^{Grinblatt et al., 2011}; ^{Agarwal and Mazumder, 2013}; ^{Cole et al., 2014}). Notwithstanding, ^{Baklouti (2013)} found that borrowers with the lowest educational levels exhibit the highest repayment rate, the idea being that clients with a low level of education tend to have fewer financial alternatives, and therefore value the loans they do obtain more highly. This finding brings support to the conclusion of Muhammad Yunus that poor borrowers, who are completely financially excluded, are more trustworthy than rich ones. This might be an explanation for the negative relationship that is found between cognitive characteristics and repayment behavior, particularly in a country with high levels of financial exclusion of the low-income population (^{Demirgüç-Kunt et al., 2015}).

It should be noted, however, that this result could also be due in part to measurement errors. Specifically, in this sample nobody provided a correct answer to the question included to measure cognitive ability, and the answers to questions included to measure numerical ability (simple interest calculation) and financial literacy (knowledge of the concept of inflation) were not answered correctly by most of the sampled individuals. Although these questions have proved to be appropriate to build valid indicators of cognitive characteristics and financial literacy for individuals in developed economies (^{Frederick, 2005}; ^{Burks et al., 2009}; ^{Lusardi and Mitchell, 2014}), it is possible that non-verbal IQ tests, such as Raven’s Matrices and Digit test, could be more effective at measuring individuals’ cognitive ability for developing economies and low-income populations (^{Arráiz et al., 2015}).

Given the nature of survey data, a possible selection bias could be present. In the sample, around 14% of the people completed the survey; this may be due to the lack of monetary incentives. However, given that the sample was taken from the clients of Provident that were active at the moment of the survey, there is information about who completed the survey and who did not. We found no statistical difference between these two groups in the variables of the age, number of active loans or gender. The complete analysis can be found in the online appendix.

That said, given the lack of access to data from other companies, it is impossible to evaluate if Provident’s clients are similar to the general population of creditors at any level. For this reason, the results should be taken with caution if intended to apply to other populations. However, given the consistency with the literature, the possible bias could have affected the estimates, but not to the extent of contradicting the direction or significance of the effects.

Finally, contrary to refinancing repayment studies within the traditional microfinance literature (^{Armendariz De Aghion and Murdoch, 2000}), in this sample, the refinancing incentive does not constitute a powerful tool for getting this institution’s clients to repay on time. Our result however is consistent with the finding that individuals that are in the Current group are characterized by short-term impatience. We conclude by highlighting that the preceding results and discussion provide a reason for future research that integrates new personality and cognition theories with traditional microfinance repayment theory.