Paper

Microfinance and Moneylender Interest Rate: Evidence from Bangladesh

Impact of microfinance programs on moneylender interest rates

This paper explores the impact of MFI program expansion on moneylender interest rates in rural Bangladesh.The study finds that moneylender interest rates go up with the percentage of households borrowing from MFIs. Results indicate that:

  • MFI program expansion increases moneylender interest rates in villages in which more loans are invested in productive economic activities;
  • Borrowers will resort to moneylenders for additional funds to sustain their projects if MFI loans are inadequate and repayment schedules are tight;
  • Increased demand for funds will drive up moneylender interest rates;
  • Competition among moneylenders lowers money lender interest rates;
  • Distance from place of commercial activities increases moneylender interest rates.

These results have important implications for policymakers. Borrowers can make more productive investments if MFIs meet loan demands by allowing more flexibility in loan disbursement and repayment schedules. Borrower projects will also be more profitable if MFIs expand their program of loan-only to loan-plus. Finally, active presence of moneylenders is not necessarily harmful, and can even be beneficial if increasing competition between formal and informal lenders increases borrowers' access to funds at competitive interest rates.

About this Publication

By Mallick, D.
Published