Microfinance and moneylender interest rate: evidence from Bangladesh

Abstract

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 programme expansion on the moneylender interest rates in Bangladesh, and found that moneylender interest rates increased with microfinance programme expansion. Microfinance programme 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 schedule, which in turn increased demand for moneylender loans.