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Credit Elasticities in Less-Developed Economies: Implications for Microcredit

Author

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  • Dean Karlan

    ()

  • Jonathan Zinman

Abstract

Policymakers often urge microfinance institutions to increase interest rates to eliminate reliance on subsidies. However, existing research provides little evidence on interest rate sensitivities in MFI target markets as well as little guidance on how to derive rates. MFI policymakers generally presume that the poor are largely insensitive to interest rates and recommend that MFIs increase interest rates without fear of diminishing access. In this working paper, CGD non-resident fellow and his co-author test the elasticity of demand for microcredit using field data from South Africa. A for-profit South African lender worked with the authors to randomize 50,000 individual interest rate direct mail offers and tracked gross revenue and repayment, allowing the authors to access the effects on the targeted access margin that interests policymakers. They also worked with the lender to explore a margin of loan contracting that has been largely ignored by academics, policy makers and practitioners: loan maturity. They found that price sensitivity increased sharply when individuals were offered a rate above their prior loan's rate. They also found that loan size is far more responsive to changes in loan maturity than to changes in interest rates. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106 –111).

Suggested Citation

  • Dean Karlan & Jonathan Zinman, 2007. "Credit Elasticities in Less-Developed Economies: Implications for Microcredit," Working Papers 110, Center for Global Development.
  • Handle: RePEc:cgd:wpaper:110
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    File URL: http://www.cgdev.org/content/publications/detail/12328
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    Cited by:

    1. Katsushi Imai & Raghav Gaiha & Ganesh Thapa, 2008. "Financial crisis in Asia and the Pacific Region: Its genesis, severity and impact on poverty and hunger," The School of Economics Discussion Paper Series 0810, Economics, The University of Manchester.

    More about this item

    Keywords

    interest rates; subsidies; credit elasticity; loan maturity; microfinance; credit market;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M20 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - General
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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