Do Interest Rates Matter? Credit Demand in the Dhaka Slums
Rajeev H. Dehejia
National Bureau of Economic Research (NBER); Wagner School of Public Service; Institute for the Study of Labor (IZA); CESifo
New York University (NYU) - Robert F. Wagner Graduate School of Public Service; New York University (NYU) - Department of Economics
International Christian University (ICU)
October 1, 2005
ADB Institute Research Paper No. 69
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.
Number of Pages in PDF File: 26
Keywords: microfinance, credit, demand
JEL Classification: G21, O16, O17working papers series
Date posted: April 28, 2009 ; Last revised: August 22, 2011
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