Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/53521
Authors: 
Dehejia, Rajeev
Montgomery, Heather
Morduch, Jonathan
Year of Publication: 
2005
Series/Report no.: 
ADB Institute Discussion Papers 37
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, 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.
Document Type: 
Working Paper

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