IDEAS home Printed from https://ideas.repec.org/a/eee/deveco/v97y2012i2p437-449.html
   My bibliography  Save this article

Do interest rates matter? Credit demand in the Dhaka slums

Author

Listed:
  • Dehejia, Rajeev
  • Montgomery, Heather
  • Morduch, Jonathan

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.

Suggested Citation

  • Dehejia, Rajeev & Montgomery, Heather & Morduch, Jonathan, 2012. "Do interest rates matter? Credit demand in the Dhaka slums," Journal of Development Economics, Elsevier, vol. 97(2), pages 437-449.
    • Handle: RePEc:eee:deveco:v:97:y:2012:i:2:p:437-449
    DOI: 10.1016/j.jdeveco.2011.06.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304387811000587
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Dean Karlan & Jonathan Zinman, 2009. "Observing Unobservables: Identifying Information Asymmetries With a Consumer Credit Field Experiment," Econometrica, Econometric Society, vol. 77(6), pages 1993-2008, November.
    2. Beatriz Armendáriz & Jonathan Morduch, 2010. "The Economics of Microfinance, Second Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262014106, September.
    3. David B. Gross & Nicholas S. Souleles, 2002. "Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 149-185.
    4. Rob Alessie & Stefan Hochguertel & Guglielmo Weber, 2005. "Consumer Credit: Evidence From Italian Micro Data," Journal of the European Economic Association, MIT Press, vol. 3(1), pages 144-178, March.
    5. McKenzie, David J & Woodruff, Christopher, 2006. "Do Entry Costs Provide an Empirical Basis for Poverty Traps? Evidence from Mexican Microenterprises," Economic Development and Cultural Change, University of Chicago Press, vol. 55(1), pages 3-42, October.
    6. Suresh de Mel & David McKenzie & Christopher Woodruff, 2009. "Returns to Capital in Microenterprises: Evidence from a Field Experiment," The Quarterly Journal of Economics, Oxford University Press, vol. 124(1), pages 423-423.
    7. Dean S. Karlan & Jonathan Zinman, 2008. "Credit Elasticities in Less-Developed Economies: Implications for Microfinance," American Economic Review, American Economic Association, vol. 98(3), pages 1040-1068, June.
    8. Ashok S. Rai & Tomas Sjöström, 2004. "Is Grameen Lending Efficient? Repayment Incentives and Insurance in Village Economies," Review of Economic Studies, Oxford University Press, vol. 71(1), pages 217-234.
    9. Robert Cull & Asli Demirgüç-Kunt & Jonathan Morduch, 2009. "Microfinance Meets the Market," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 167-192, Winter.
    10. Marguerite S. Robinson, 2001. "The Microfinance Revolution," World Bank Publications, The World Bank, number 28956, June.
    11. Stiglitz, Joseph E, 1990. "Peer Monitoring and Credit Markets," World Bank Economic Review, World Bank Group, vol. 4(3), pages 351-366, September.
    12. Morduch, Jonathan, 1999. "The role of subsidies in microfinance: evidence from the Grameen Bank," Journal of Development Economics, Elsevier, vol. 60(1), pages 229-248, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Karlan, Dean & Morduch, Jonathan, 2010. "Access to Finance," Handbook of Development Economics, in: Dani Rodrik & Mark Rosenzweig (ed.), Handbook of Development Economics, edition 1, volume 5, chapter 0, pages 4703-4784, Elsevier.
    2. Giné, Xavier & Karlan, Dean S., 2014. "Group versus individual liability: Short and long term evidence from Philippine microcredit lending groups," Journal of Development Economics, Elsevier, vol. 107(C), pages 65-83.
    3. de Lucinda, Claudio Ribeiro & Vieira, Rodrigo Luiz, 2014. "Interest Rates and Informational Issues in the Credit Market: Experimental Evidence from Brazil," World Development, Elsevier, vol. 59(C), pages 47-58.
    4. Dean S. Karlan & Jonathan Zinman, 2008. "Credit Elasticities in Less-Developed Economies: Implications for Microfinance," American Economic Review, American Economic Association, vol. 98(3), pages 1040-1068, June.
    5. Begoña Gutiérrez Nieto & Carlos Serrano-Cinca, 2019. "20 Years of Research in Microfinance: An Information Management Approach," Working Papers CEB 19-005, ULB -- Universite Libre de Bruxelles.
    6. B. Mak Arvin & Byron Lew (ed.), 2015. "Handbook on the Economics of Foreign Aid," Books, Edward Elgar Publishing, number 15762.
    7. Dean Karlan & Jonathan Zinman, 2010. "Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts," Review of Financial Studies, Society for Financial Studies, vol. 23(1), pages 433-464, January.
    8. de Quidt, Jonathan & Fetzer, Thiemo & Ghatak, Maitreesh, 2016. "Group lending without joint liability," Journal of Development Economics, Elsevier, vol. 121(C), pages 217-236.
    9. Jonathan de Quidt & Thiemo Fetzer & Maitreesh Ghatak, 2018. "Market Structure and Borrower Welfare in Microfinance," Economic Journal, Royal Economic Society, vol. 128(610), pages 1019-1046, May.
    10. Robert Cull & Asli Demirguç-Kunt & Jonathan Morduch, 2007. "Financial performance and outreach: a global analysis of leading microbanks," Economic Journal, Royal Economic Society, vol. 117(517), pages 107-133, February.
    11. Cláudio Ribeiro de Lucinda & Rodrigo Luiz Vieira, 2011. "An Experimental Analysis of the Brazilian Personal Credit Market," Working Papers 10-2011, Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto.
    12. Sule Alan & Gyongyi Loranth, 2013. "Subprime Consumer Credit Demand: Evidence from a Lender's Pricing Experiment," Review of Financial Studies, Society for Financial Studies, vol. 26(9), pages 2353-2374.
    13. Ahlin, Christian & Gulesci, Selim & Madestam, Andreas & Stryjan, Miri, 2020. "Loan contract structure and adverse selection: Survey evidence from Uganda," Journal of Economic Behavior & Organization, Elsevier, vol. 172(C), pages 180-195.
    14. Serrano-Cinca, Carlos & Gutiérrez-Nieto, Begoña, 2014. "Microfinance, the long tail and mission drift," International Business Review, Elsevier, vol. 23(1), pages 181-194.
    15. Xavier Giné & Pamela Jakiela & Dean Karlan & Jonathan Morduch, 2010. "Microfinance Games," American Economic Journal: Applied Economics, American Economic Association, vol. 2(3), pages 60-95, July.
    16. Karlan, Dean S. & Zinman, Jonathan, 2005. "Elasticities of Demand for Consumer Credit," Center Discussion Papers 28485, Yale University, Economic Growth Center.
    17. Lukas, Moritz, 2017. "Estimating interest rate elasticities in consumer credit," Economics Letters, Elsevier, vol. 156(C), pages 155-158.
    18. Janda, Karel & Zetek, Pavel, 2014. "Survey of Microfinance Controversies and Challenges," MPRA Paper 56657, University Library of Munich, Germany.
    19. Lukas, M., 2019. "Relative prices and product substitution: Evidence from shocks to consumer credit interest rates," Journal of Behavioral and Experimental Finance, Elsevier, vol. 21(C), pages 39-49.
    20. Disha Bhanot & Varadraj Bapat, 2019. "Contributory factors towards sustainability of bank-linked self-help groups in India," Asia-Pacific Sustainable Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 26(2), pages 25-55, December.

    More about this item

    Keywords

    Microcredit; Interest rates; Loan demand; Credit constraints;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:deveco:v:97:y:2012:i:2:p:437-449. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Nithya Sathishkumar). General contact details of provider: http://www.elsevier.com/locate/devec .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.