Endnotes

¹ We are very grateful for access to data from SafeSave, Dhaka. Stuart Rutherford, Mark Staehle, and the senior staff of SafeSave have been very generous with their time in answering questions about the data and product rules. Elvira Kurmanalieva provided expert research assistance in Tokyo, and Sarojini Hirshleifer helped with the industry-level microfinance data. We have benefited from comments from Jonathan Zinman, David Porteus, and seminar participants at Columbia. We take all responsibility for the analyses and any errors.

¹ The July 2003 Microbanking Bulletin provides the highest quality data available, covering 124 leading microlenders. Their average portfolio at risk greater than 30 days is 2.8 percent.

² This argument has held greater force in Latin America and Africa, where microfinance interest rates have tended to be higher, than in South Asia, where fears are more often expressed that high interest rates will deter promising clients and diminish social and economic impacts on households.

³ Gross and Souleles (2002) provide estimates of the sensitivity of credit card customers in the United States to interest rate changes. Their findings are in the same range as ours. They find that the long-run (at the end of one year) elasticity of debt to the interest rate is -1.3, which is greater (in absolute value) than our estimates, but they find a smaller (in absolute value) elasticity for interest rate increases than decreases. Under half of their elasticity comes from shifting balances between accounts and the rest is from reduction in total debt. Karlan and Zinman (2005) provide interesting evidence that relates to the question here, finding that a one percentage point per month increase in the stated interest rate for loans (offered in a direct mail solicitation letter by a bank in South Africa) reduces the take-up of the solicitation by -0.3 percentage points (from an average take-up rate of 7 percent).

⁴ See, for example, the critical discussion in Adams, et al (1984). Homer and Sylla (1996) document how attitudes toward interest rate restrictions have swung widely through time. They begin with Hammurabi, King of Babylonia in about 1800 B.C., who restricted interest rates on grain loans (to be repaid in kind) to 33 1/3 percent per year. Rates on loans in silver could be no higher than 20 percent per year. The ancient Greeks did away with restrictions under Solon’s rule, but the Romans brought them back, limiting charges on loans to 8 1/3 percent per year. Charlemagne forbade all interest, a view continued by most theologians in the Middle Ages, only to be undone in northern Europe with the Reformation. England continued without restrictions, while in the contemporary United States individual states set limits on interest rates on personal loans at around 30-45 percent per year. In developing countries today, interest rate restrictions remain the norm, and in many cases special laws have had to be written to give microlenders the leeway needed to work in poor communities while covering costs.

⁵ Sayad (1983, p. 381).

⁶ The phenomenon is part of a broader problem of financial repression as described by McKinnon (1973).

⁷ The argument often invokes a simple version of the idea of diminishing marginal returns to capital (e.g., Consultative Group to Assist the Poorest, 1996).

⁸ The arguments are reviewed in Armendariz and Morduch (2005). McKenzie and Woodruff (2003) give evidence from Mexico that shows no signs of non-convexities in production for small-scale entrepreneurs.

⁹ Rutherford (1997) describes a survey of informal finance in the Dhaka slums. Half of the sample, collected from financial diaries described in Rutherford (2004), is from the Dhaka slums. Both studies provide rich data on a relatively small sample. In contrast, the present study takes advantage of a large sample but just a limited number of variables.

¹⁰ The quote is taken from www.safesave.org in April 2004.

¹¹ Armendariz and Morduch (2005) describe the use of financial collateral and its rationale.

¹² As Stuart Rutherford, the founder of SafeSave, remembers the switch: “It was fairly arbitrary… I don't think there was anything special about February 2000 - it is just that by then the pro-rise argument finally prevailed in the discussions that I had with [the senior staff].” Email correspondence, March 6, 2005.

¹³ On January 1, 2000, US$1 = 50.9 taka. So 500 taka is $9.83.

¹⁴ Alternative definitions, based on cash inflows (did the customer make deposits or repay loans in amounts that together totaled 200 taka or more in any of the months between June and August 1999?) and on average savings balances, yield very similar results.

¹⁵ These rules were written by Stuart Rutherford. Kalyanpur was originally served by the Tikkapara branch and became its own branch in September 1998. The product rules were unchanged during the switch.

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