Credit Elasticities in Less-Developed Economies: Implications for Microfinance

Microcredit fights poverty by expanding access to credit. Some microfinance institutions (MFIs) focus on maximizing profits, and do so while lending to the poor. Others seek to maximize access for the poor subject to a budget constraint. Regardless, nearly all MFIs face pressure from policymakers, donors, and investors to eliminate their reliance on subsidies. Economic modeling, policy, and practice suggest that loan pricing is critically related to reliance on subsidies, and to the functioning of credit markets more generally. Yet existing research offers little evidence on interest rate sensitivities in MFI target markets, and little methodological guidance on how to derive optimal rates. Instead, MFIs and policymakers rely heavily on descriptive evidence and intuition. Policymakers often presume that the poor are largely insensitive to interest rates, and then prescribe that MFIs should increase rates without fear of reducing