Despite the growing interest in the subject of micro finance very little, if any, academic research on the Palestinian case exists. This paper starts filling this gap by analysing the development of the micro credit industry in Palestine between 2000 and 2008.
This paper shows that at macro level the industry has a strong potential for growth, but its full development is frustrated by inefficiencies in credit allocation and high level of risk, whose most evident sign being the problem of late or no re-payment of loans.
By using data from one of the most important micro credit agencies, the Arab Centre for Agricultural Development (ACAD), we analyse the determinants of late payment. The most important results are that high interest rates increase the probability of late repayment, loan size, when above the “micro” threshold has no impact, while female customers and the one with banks guarantees are less likely to pay late. The policy implications are that while going towards a more “market-based” approach might provide some advantages in terms of risk reduction, it will not per se solve the problem while will certainly expose the most vulnerable sectors of the population to further credit rationing.