Contractual Structure, Borrower Selection, and Hypothetical Loan Demand: Survey Evidence from Uganda

Abstract: 
Using survey data on micro and small enterprises in Uganda, this study investigates the phenomenon of ‘adverse selection’ in credit markets – i.e. the presence of high-risk, low-return borrowers in the client base of microfinance institutions – and finds that lower interest rates and less stringent collateral requirements are likely to attract safer borrowers.