Do Interest Rates Matter? Credit Demand in the Dhaka Slums
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 rate 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.
This paper is set out in the following sections:
- Section 1: Introduction
- Section 2: Reviews the prior literature and debates on interest rates
- Section 3: Provides details on SafeSave
- Section 4: Summarises the data
- Section 5: Outlines the identification strategy
- Section 6: Presents results on the interest elasticity of loan demand
- Section 7: Concludes
- Resource type Paper
- Author Dehejia, R, Montgomery, H and Morduch, J
- Year of Publication2005
- Number of pages33 pp.
- EditionADB Institute Discussion Paper
- Keywords Interest Rate, Access To Credit, Sustainability