Credit Elasticities in Less-Developed Economies: Implications for Microfinance

Karlan, Dean S.; Zinman, Jonathan

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Credit Elasticities in Less-Developed Economies: Implications for Microfinance

CEPR Discussion Paper No. 6071

58 Pages Posted: 29 Jun 2007

See all articles by Dean S. Karlan

Dean S. Karlan

Yale University; Northwestern University - Kellogg School of Management; Innovations for Poverty Action; Massachusetts Institute of Technology (MIT) - Abdul Latif Jameel Poverty Action Lab (J-PAL); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Jonathan Zinman

Dartmouth College; Innovations for Poverty Action; Jameel Poverty Action Lab; National Bureau of Economic Research (NBER)

Date Written: January 2007

Abstract

Policymakers often prescribe that microfinance institutions increase interest rates to eliminate reliance on subsidies. This strategy makes sense if the poor are rate insensitive: then microlenders increase profitability (or achieve sustainability) without reducing the poors' access to credit. We test the assumption of price inelastic demand using randomized trials conducted by a consumer lender in South Africa. The demand curves are downward-sloping, and steep for price increases relative to the lender's standard rates. We also find that loan size is far more responsive to changes in loan maturity than to changes in interest rates, which is consistent with binding liquidity constraints.

Keywords: Microfinance

JEL Classification: G2

Suggested Citation: Suggested Citation

Karlan, Dean S. and Karlan, Dean S. and Zinman, Jonathan, Credit Elasticities in Less-Developed Economies: Implications for Microfinance (January 2007). CEPR Discussion Paper No. 6071, Available at SSRN: https://ssrn.com/abstract=997352