Microfinance and Moneylender Interest Rate: Evidence From Bangladesh

The linkage between the formal and informal credit markets has long been of great interest to development economists. This paper addressed one aspect of the linkage by empirically investigating the impact of the microfinance program expansion on the moneylender interest rates in Bangladesh, and found that moneylender interest rates increased with microfinance program expansion. Microfinance program expansion increased moneylender interest rates in the villages in which more loans were invested in productive economic activities than consumption. Borrowers resort to moneylenders for additional funds because of inadequate supply, unavailability of seasonal working capital from microfinance institutions, and tight repayment schedules, which in turn increased demand for moneylender loans. Results show that, borrowers can make more productive investments if MFIs meet their demand for loans by allowing more flexibility in loan disbursement and repayment schedules. Borrower projects will also be more profitable if MFIs expand their program from loan-only to loan-plus.

Author: Mallick, Debdulal
Type: Monograph
Year: 2009