Working Paper: CEPR ID: DP6071
Authors: Dean S. Karlan; Jonathan Zinman
Abstract: Policymakers often prescribe that microfinance institutions increase interest rates to eliminate reliance on subsidies. This strategy makes sense if the poor are rate insensitive: then microlenders increase profitability (or achieve sustainability) without reducing the poor?s access to credit. We test the assumption of price inelastic demand using randomized trials conducted by a consumer lender in South Africa. The demand curves are downward-sloping, and steep for price increases relative to the lender?s standard rates. We also find that loan size is far more responsive to changes in loan maturity than to changes in interest rates, which is consistent with binding liquidity constraints.
Keywords: microfinance
JEL Codes: G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Interest rates (E43) | Loan demand (G51) |
| Loan maturity (G51) | Loan demand (G51) |
| Interest rates (E43) | Loan size sensitivity (G21) |
| Loan maturity (G51) | Loan size sensitivity (G21) |
| Increasing interest rates (E43) | Repayment rates (E43) |
| Increasing interest rates (E43) | Overall profitability (L21) |