Effects of Interests Rates on Credit Demand
Name
DDBA 8110 - Business Operations
Walden
2022
Effects of Interests Rates on Credit Demand
According to Rey, (2003) if the demand for credit by the poor changes little when interest rates
increase, lenders can raise fees to cost-covering levels without losing customers. This claim is at
the core of sustainable microfinance strategies that aim to provide banking services to the poor
while eschewing long term subsidies, but, so far, there is little direct evidence of this. New credit
contracts have led to surprisingly high loan repayment rates and economists have focused on the
way that the contracts mitigate adverse selection and moral hazard, problems that undermined
alternative attempts to lend to poor households without collateral. But high repayment rates are
insufficient to drive a revolution. The key to the expansion of microfinance globally, it is argued,
depends on the success of microfinance as a commercial phenomenon, free from subsidy.
Rhyne, (2002); asserts that, the promise hinges as much (or more) on the ability to contain costs
and to price loans at interest rates that are high enough to generate profits. Once profitability is in
hand, micro lenders can expand globally with minimal external support. The logic of this part of
the microfinance revolution is built on the idea that poor households are willing and able to pay
interest rates for loans that fully cover the costs of lenders. Specifically, it is argued that poor
households primarily seek access to credit, not necessarily “cheap” credit. When poor
households are not very sensitive to price changes, prices can be raised without fear of losing the
core customer base and suffering from mission drift. According to Robinson, (2001), When that
is so, microfinance institutions can offer credit at a sufficiently high interest rate to cover their
operating costs and at the same time not merely skim the cream by appealing only to the most
eligible borrowers.
Murdoch, (1999) asserts that, raising interest rates can in principle exacerbate moral hazard and
adverse selection, worsening loan repayment rates and screening out the most reliable borrowers.
And, while micro lenders may still find a pool of customers after real interest rates are raised, the
customers may not be from the same pool that was willing and able to pay the lower rates. Fears
like these, coupled with a strongly- felt moral imperative to keep costs as low as possible for the
poor, have compelled the larger micro lenders in Bangladesh to keep real interest rates below 40
percent per year, even if it means turning to subsidized resources to cover costs.
According to Robinson, (2001) interest rates are the signals that affect the channeling of funds to
demanders or borrowers from suppliers or savers, directly or through financial intermediaries.
Since interest rates and time are closely related, the expression that "time is money" is helpful in
understanding the financial demand supply linkage and, in turn, the determination of interest
rates.
REFERENCES
Ajzen, I., (2003). The theory of planned behavior: Organization behavior and human decision
processes. 50 (2)
Akoten, J. E., Sawada, Y., and Otsuka, K. (2006).“The determinants of credit access and its
impact on micro and small enterprises: The case of garment
producers in Kenya”. Economic development and cultural change,.
Alex Winter-Nelson and Anna A. Temu (2005). “Liquidity constraints, access to credit and pro-
poor growth in rural Tanzania”. Wiley interscienceDOI: Beck
Bekele, S., Obare, G. and Muricho, G. (2008).“Rural market imperfections and the role of
institutions in collective action to improve markets for the
poor”.National resources forum 32.
Central Bank of Kenya (2007). Monthly Report for October 2007.
Dercon, S. and L. Christiaensen (2007) “Consumption Risk, Technology adoption and Poverty
traps: Evidence from Ethiopia.” World Bank Policy Research
Paper4257.Washington DC.
Heckman, J., R. Lalonde, Smith, J., (1999). “The Economic and Econometrics of active
labormarketprogrammes”. Handbook of labor Economics vol. III, ed.
Holden, S. J., (1999). Seeking innovations in the Gambia: An opportunistic approach to change
in livestock services for small holders: A critical evaluation of the
delivery of animal health and production services, edited by
Humphrey and Schmitz (1996) “The C approach to industrial policy”. World Development
“Technological Capability of Micro-enterprises in Kenya’s informal
sector” A Report on Technovation vol.19 (2)
Keen, C, Wetzels, M., Ruyter, K.,& Feinberg, R. (2004). E-Tailers versus retailers which factors
determine consumers preferences. Journal of Business Research, 57(7), 685-
Kliebenstein, J. B., Heffernan, W.D., Barret,D. A., Kirtley, C. L., (1981). “Economic and
sociological factors in farming”.Journal of American Society.Farm
managers Rural Appraisers
Liao, T. F (1999).“Interpreting probability models: logit, probit and other generalized linear
models: Quantitative applications in the social sciences”. Series 101, Sage
university paper.
Malecki and Tootle,(1996). “The Role of Networks in Small firm
competitiveness”.InternationalJournal of Technology Development, issue
Morduch J.,(1999). “The micro-finance promise.”Journal of Economics 37(4).
Mosley, P. and A. Verschoor, (2005). “Risk attitudes and vicious cycle of Poverty”. The
European journal of development Research17(1).
Poulton, C., Kydd, J., and Doward, A., (2006).“Overcoming market constraints on pro-poor
agricultural growth in Sub-Saharan Africa”. Development Policy Review,
Rosenzweig M., (1999). “Risk implicit contracts and the Family in Rural areas of low-income
countries”.The Economic journal98 (393).
Rougoor, C. W., Trip, G., Huirne, R. B. M., Renkema, J. A.,(1998). “How to define and study
farmers’ management capacity: Theory and use in agricultural
Sanders, J. H., Southgate, D. D., and Lee, J. G. (1995).The economics of soil degradation:
technological change and policy alternatives.SMSS Technical monograph,
Washington: World Soil Resources.
Shepherd, A. (2007).“Approaches to linking producers to markets”.FAORural infrastructure and
Agro-industries Division Rome.
