Interest rates charged on loans by microcredit institutions are increasingly coming under scrutiny, leading lenders to examine the rationale behind the rates they charge. Most institutions seek to set an interest rate which covers their costs while being competitive with other credit providers. Some explicitly try to keep rates to a minimum in order to provide a low-cost service to their clients. There has, however, been little rigorous attempt to evaluate how demand is affected by changes in the interest rate offered. Knowing how important interest rates differentials are to clients in selecting one microcredit provider over another will clearly be of great interest to lenders themselves. The larger question, though, is the extent to which lower rates could increase aggregate demand by encouraging new borrowers into the industry.

IPA is working with Opportunity International in Ghana to offer individual loans at a range of interest rates to new clients. Four different interest rates are being tested, one of which is higher and two of which are lower than Opportunity’s normal rate for individual loans.

Business owners are approached at their premises where they conduct a short survey and are offered an invitation to apply for an individual loan with Opportunity International. An interest rate is randomly assigned to each respondent at the time of the survey via cell phone text messages. The take-up of loans among those surveyed is monitored, along with the loan size demanded and repayment patterns of those who receive loans.