Commitment of Microfinance Institutions and Survival Entrepreneurs Under Financial Distress

Abstract

Commitment leads directly to cooperative behavior, vital for long-term mutually beneficial relationships. When a relationship is weak and not considered in economic transactions, causing a Microfinance Institution (MFI) to disregard a survival entrepreneur’s action, economic agents (i.e., the MFI and the entrepreneur) will lose economic rents. On the other hand, when a relationship is strong, and an entrepreneur’s actions are observed, the resulting economic rents will be such that each party will be better off building a relationship and commitment than not building it. COVID-19 in 2020 and hurricane OTIS in 2023 gave us an extraordinary opportunity to measure the impact of commitment in the interaction of MFI and survival entrepreneurs. Based on 686,657 observations of credits from January 2020 to June 2021 during COVID-19 and 22,384 observations from September 2023 to February 2024 during OTIS23, granted by a Mexican MFI to groups of survival female entrepreneurs, this study analyzes how relaxing credit policies during financial distress times, positively affect entrepreneurs' commitment to the MFI. This means that building relationships and commitment creates and distributes value among economic agents.