Do interest rates matter? credit demand in the Dhaka Slums
Heather Montgomery and
Jonathan Morduch ()
MPRA Paper from University Library of Munich, Germany
If the demand for credit by the poor changes little when interest rates increase, lenders can raise fees to cost-covering levels without losing customers. This claim is at the core of sustainable microfinance strategies that aim to provide banking services to the poor while eschewing long-term subsidies, but, so far, there is little direct evidence of this. This paper uses data from SafeSave, a credit cooperative in the slums of Dhaka, Bangladesh, to examine how sensitive borrowers are to increases in the interest rate on loans. Using unanticipated between-branch variation in the interest rate we estimate interest elasticities of loan demand ranging from -0.73 to -1.04. Less wealthy accountholders are more sensitive to the interest rate than (relatively) wealthier borrowers (an elasticity of -0.86 compared to -0.26), and consequently the bank’s portfolio shifts away from its poorest borrowers when it increases the interest rate.
Keywords: microfinance; credit; demand (search for similar items in EconPapers)
JEL-codes: O17 O16 G21 (search for similar items in EconPapers)
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Journal Article: Do interest rates matter? Credit demand in the Dhaka slums (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:33146
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