Do Interest Rates Matter? Credit Demand in the Dhaka Slums
Dehejia, Rajeev; Montgomery, Heather; Morduch, Jonathan | September 2005
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.
CitationDehejia, Rajeev; Montgomery, Heather; Morduch, Jonathan. 2005. Do Interest Rates Matter? Credit Demand in the Dhaka Slums. © Asian Development Bank. http://hdl.handle.net/11540/3626. License: CC BY 3.0 IGO.
Regional Economic Development
Financial Sector Regulation
Economies in transition
Social responsibility of business
Cost and standard of living
Banks and bankingShow allCollapse