Do interest rates matter? Credit demand in the Dhaka slums

Rajeev Dehejia, Heather Montgomery, Jonathan Morduch

Research output: Contribution to journalArticle

Abstract

"Best practice" in microfinance holds that interest rates should be set at profit-making levels, based on the belief that even poor customers favor access to finance over low fees. Despite this core belief, little direct evidence exists on the price elasticity of credit demand in poor communities. We examine increases in the interest rate on microfinance loans in the slums of Dhaka, Bangladesh. Using unanticipated between-branch variation in prices, we estimate interest elasticities from -0.73 to -1.04, with our preferred estimate being at the upper end of this range. Interest income earned from most borrowers fell, but interest income earned from the largest increased, generating overall profitability at the branch level.

Original languageEnglish (US)
Pages (from-to)437-449
Number of pages13
JournalJournal of Development Economics
Volume97
Issue number2
DOIs
StatePublished - Mar 1 2012

Keywords

  • Credit constraints
  • Interest rates
  • Loan demand
  • Microcredit

ASJC Scopus subject areas

  • Development
  • Economics and Econometrics

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