Do interest rates matter? credit demand in the Dhaka Slums

Rajeev Dehejia, Heather Montgomery and Jonathan Morduch

MPRA Paper from University Library of Munich, Germany

Abstract: 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: G21 O16 O17 (search for similar items in EconPapers)
Date: 2005-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (37)

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Related works:
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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