Do Interest Rates Matter? Credit Demand in the Dhaka Slums

By Rajeev Dehejia, Heather Montgomery, J. Morduch. 2012

233 citations recorded by the source corpus.

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 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.

Subfields: Accounting, Economics and Econometrics, Urban Studies

View Paper: https://www.semanticscholar.org/paper/a56e9ea3b8f5263970adc160edff5d43eb2c53e1

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Citations in the corpus

Capital Structure and Sustainability: An Empirical Study of Microfinance Institutions (2012, background): “Thus, institutional structure and capital flows to 1 Dehejia, Montgomery, and Morduch (2005) .”
Access to Finance (2010, unknown): “Dehejia et al. (2009) investigate changes in loan demand when a microfinance institution in Dhaka raised interest rates on loans from 2 percent per month to 3 percent per month in one branch but not in a similar location.”
Determinants of Default in P2P Lending (2015, background): “Dehejia, Montgomery and Morduch [22] argue that financially excluded people seek access to credit, despite having to pay a high price.”
Firm-Specific Human Capital, Organizational Incentives, and Agency Costs: Evidence from Retail Banking (2014, background): “14 The demand elasticity that we find is −0.87; Dehejia et al. (2012) report elasticities ranging from −0.73 to −1.04. accounts.”
The microfinance revolution: an overview (2008, unknown): “However, in a recent empirical study on the SafeSave program in Dhaka slums, Dehejia, Montgomery, and Morduch (2005) show that the elasticity of demand for microcredit may be significantly negative even though certain groups of borrowers (particularly the wealthier ones) do not reduce their demand…”