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Do interest rates matter? Credit demand in the Dhaka slums

Rajeev Dehejia, Heather Montgomery and Jonathan Morduch ()

Journal of Development Economics, 2012, vol. 97, issue 2, 437-449

Abstract: “Best practice” in microfinance holds that interest rates should be set at profit-making levels, based on the belief that even poor customers favor access to finance over low fees. Despite this core belief, little direct evidence exists on the price elasticity of credit demand in poor communities. We examine increases in the interest rate on microfinance loans in the slums of Dhaka, Bangladesh. Using unanticipated between-branch variation in prices, we estimate interest elasticities from −0.73 to −1.04, with our preferred estimate being at the upper end of this range. Interest income earned from most borrowers fell, but interest income earned from the largest increased, generating overall profitability at the branch level.

Keywords: Microcredit; Interest rates; Loan demand; Credit constraints (search for similar items in EconPapers)
JEL-codes: G21 O13 (search for similar items in EconPapers)
Date: 2012
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Working Paper: Do interest rates matter? credit demand in the Dhaka Slums (2005) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:97:y:2012:i:2:p:437-449

DOI: 10.1016/j.jdeveco.2011.06.001

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