Carrots vs sticks: the influence of social and financial sanctions in debt recovery

Purpose This study aims to quantify the direct impact of social and financial sanctions (sticks) on social relations. This study takes into account the mediating effect of social relationships between social sanctions, financial sanctions and loan repayment performance. The moderating effect of dynamic incentives (carrots) on the association between social relationships and loan repayment performance is also considered in this study. Design/methodology/approach In this study, data were collected through a structural questionnaire from the 505 respondents including 125 microfinance institutions (MFIs) employees and 380 potential borrowers. This study used two structural equation modeling approaches including the measurement model (outer model) and structural model (inner model). The reliability and validity of the data collection of instruments were measured through the measurement model, whereas the intensity of relationship among the underpinning variables was measured through the structural model. Findings These results found that social and financial sanctions (sticks) had a positive and significant effect on social relations and served as social relations as mediators between social sanctions, financial sanctions and loan repayment performance. Additionally, this study demonstrated that dynamic incentives (carrots) moderate the relationship between social relations and loan repayment performance. Originality/value The study contributes to the prior research by assessing the relative effectiveness of social and financial sanctions and dynamic incentives in persuading debtors to satisfy their financial obligations. The results of this study also provide important guidance for MFIs and microfinance banks as they develop strategies to improve recovery rates in light of their findings.