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
There are 2 versions of this paper
Do Interest Rates Matter? Credit Demand in the Dhaka Slums
Do Interest Rates Matter? Credit Demand in the Dhaka Slums
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: Suggested Citation
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