Conclusion

We have examined the widely held view that the loan elasticity of demand in microfinance institutions is low. The goal of reaching as many unbanked customers as possible has pushed microlenders to pursue profitability. Once profitable, microlenders can expand as far as the market will allow, without concern for the availability of funds from donors. The natural fear, though, is that raising interest rates too high will erode surpluses generated by customers and reduce the demand for financial services, undermining the original intention of the push for microfinance. This concern has, however, been largely ignored, with the argument that poor customers are apt to be insensitive to interest rates and have ample surpluses with which to pay cost-covering fees. We examine this tradeoff in the context of SafeSave, a microfinance organization operating within the slums of Dhaka.

Using between branch variation in interest rates we estimate elasticities in the range of approximately -0.73 to -1.04, with our preferred estimate being at the upper end of this range. Though SafeSave did achieve financial stability as a result of the interest rate increase, our results also suggest that this came at a cost in terms of serving the bank’s poorest clients. The bank’s loan portfolio shifted toward relatively wealthier customers (albeit still poor in absolute terms) in the year after the interest rate increase, as compared to the expected composition of the portfolio without an interest rate change.

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