Do Interest Rates Matter? Credit Demand in the Dhaka Slums

ADB Institute Research Paper No. 69

26 Pages Posted: 28 Apr 2009 Last revised: 2 Nov 2013

See all articles by Rajeev H. Dehejia

Rajeev H. Dehejia

New York University (NYU) - Robert F. Wagner Graduate School of Public Service; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA); CESifo

Jonathan Morduch

New York University (NYU) - Robert F. Wagner Graduate School of Public Service; New York University (NYU) - Department of Economics

Heather Montgomery

International Christian University (ICU)

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2005

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

JEL Classification: G21, O16, O17

Suggested Citation

Dehejia, Rajeev H. and Morduch, Jonathan and Montgomery, Heather Anne, Do Interest Rates Matter? Credit Demand in the Dhaka Slums (October 1, 2005). ADB Institute Research Paper No. 69, Available at SSRN: https://ssrn.com/abstract=1396062 or http://dx.doi.org/10.2139/ssrn.1396062

Rajeev H. Dehejia

New York University (NYU) - Robert F. Wagner Graduate School of Public Service ( email )

The Puck Building
295 Lafayette Street, Second Floor
New York, NY 10012
United States

HOME PAGE: http://users.nber.org/~rdehejia/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://users.nber.org/~rdehejia/

Institute for the Study of Labor (IZA) ( email )

P.O. Box 7240
Bonn, D-53072
Germany

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Jonathan Morduch

New York University (NYU) - Robert F. Wagner Graduate School of Public Service ( email )

The Puck Building
295 Lafayette Street, Second Floor
New York, NY 10012
United States
(212) 998-7515 (Phone)

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States

HOME PAGE: http://www.nyu.edu/projects/morduch

Heather Anne Montgomery (Contact Author)

International Christian University (ICU) ( email )

Osawa 3-10-2
Mitaka-shi
Tokyo, Mitaka-shi 181-8585
Japan

HOME PAGE: http://www.icu.ac.jp/index_e.html

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
81
Abstract Views
1,333
Rank
547,134
PlumX Metrics