Credit Elasticities in Less-Developed Economies: Implications for Microcredit

Dean Karlan and Jonathan Zinman

No 110, Working Papers from Center for Global Development

Abstract: Policymakers often urge microfinance institutions to increase interest rates to eliminate reliance on subsidies. However, existing research provides little evidence on interest rate sensitivities in MFI target markets as well as little guidance on how to derive rates. MFI policymakers generally presume that the poor are largely insensitive to interest rates and recommend that MFIs increase interest rates without fear of diminishing access. In this working paper, CGD non-resident fellow and his co-author test the elasticity of demand for microcredit using field data from South Africa. A for-profit South African lender worked with the authors to randomize 50,000 individual interest rate direct mail offers and tracked gross revenue and repayment, allowing the authors to access the effects on the targeted access margin that interests policymakers. They also worked with the lender to explore a margin of loan contracting that has been largely ignored by academics, policy makers and practitioners: loan maturity. They found that price sensitivity increased sharply when individuals were offered a rate above their prior loan's rate. They also found that loan size is far more responsive to changes in loan maturity than to changes in interest rates. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106 –111).

Keywords: interest rates; subsidies; credit elasticity; loan maturity; microfinance; credit market (search for similar items in EconPapers)
JEL-codes: E43 E51 G21 H20 M20 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2007-01
New Economics Papers: this item is included in nep-afr, nep-dev, nep-mac, nep-mfd and nep-pbe
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cgd:wpaper:110

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