The Elasticity of Demand for Microcredit

This paper examines price elasticity of microcredit using data from the Dominican Republic.

Most theoretical models assume that demand for microcredit is inelastic. Price elasticity of demand for microcredit is, however, exceptionally relevant in designing appropriate microfinance products and policy. The study uses a survey to extract loan demand schedules and elasticities of MFI borrowers in the Dominican Republic. Study findings indicate that:

• Client demand elasticities are not homogeneous, they are correlated with certain borrower characteristics;
• Microentrepreneurs, who have already entered the MFI market, have close to unit elastic demand for microcredit;
• Clients with wage labor as their primary income source and clients with low monthly business sales exhibit significantly more inelastic demand;
• Clients who are more comfortable taking risks in order to make profits, who have acquired vocational training, and who invest their loan in productive items have more elastic demand.

Study findings suggest that entrepreneurial drive, skill level and financial literacy are correlated with price elasticity of demand for microcredit.