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
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