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    Do Interest Rates Matter? Credit Demand in the Dhaka Slums

    Dehejia, Rajeev; Montgomery, Heather; Morduch, Jonathan | October 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. However, so far, there is little direct evidence that this is true. 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 account holders 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.
    Citation
    Dehejia, Rajeev; Montgomery, Heather; Morduch, Jonathan. 2005. Do Interest Rates Matter? Credit Demand in the Dhaka Slums. © Asian Development Bank Institute. http://hdl.handle.net/11540/4175. License: CC BY 3.0 IGO.
    Keywords
    Economic Development
    Economic Infrastructure
    Economic Policies
    Regional Economic Development
    Microfinance Programs
    Public Finance
    Local Financing
    Financial Stability
    Financial Sector Regulation
    Enterprises
    Financial aid
    Economies in transition
    Local Finance
    Local Government
    Insurance Companies
    Banks
    Social Equity
    Social responsibility of business
    Accounting
    Personal budgets
    Cost and standard of living
    Bank accounts
    Credit control
    Regulatory reform
    Banks and banking
    Show allCollapse
    Citable URI
    http://hdl.handle.net/11540/4175
    Metadata
    Show full item record
    Thumbnail
    2006.05.rp69.ir.credit.dhaka.slums.pdf (737.3Kb)
    Author
    Dehejia, Rajeev
    Montgomery, Heather
    Morduch, Jonathan
    Theme
    Economics
    Finance
     
    Copyright 2016-2021 Asian Development Bank Institute, except as explicitly marked otherwise
    Copyright 2016-2021 Asian Development Bank Institute, except as explicitly marked otherwise