Can an Interest-Free Credit Facility Be More Efficient than a Usurious Payday Loan?

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 underbanked 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 that the circuit moderates adverse selection and moral hazard issues more efficiently than payday lenders and mainstream financiers. Conjointly, it addresses financial exclusion issues in mainstream credit markets