TY - JOUR
T1 - Do interest rates matter? Credit demand in the Dhaka slums
AU - Dehejia, Rajeev
AU - Montgomery, Heather
AU - Morduch, Jonathan
PY - 2012/3
Y1 - 2012/3
N2 - "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.
AB - "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.
KW - Credit constraints
KW - Interest rates
KW - Loan demand
KW - Microcredit
UR - http://www.scopus.com/inward/record.url?scp=82455167868&partnerID=8YFLogxK
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U2 - 10.1016/j.jdeveco.2011.06.001
DO - 10.1016/j.jdeveco.2011.06.001
M3 - Article
AN - SCOPUS:82455167868
VL - 97
SP - 437
EP - 449
JO - Journal of Development of Economics
JF - Journal of Development of Economics
SN - 0304-3878
IS - 2
ER -