The relationship between interest rates and demand for micro-loans remains largely unexplored, and MFIs have little empirical evidence to guide them in determining if sustainability would be maximized by raising rates (increasing revenue per borrower) or lowering them (increasing take-up of loans). Answers to this question depend on the price elasticity of borrowers, that is, the extent to which demand increases as interest rates decrease, or vice versa. They also depend on the extent to which higher interest rates attract riskier clients, and whether given these higher rates clients are more likely to default.

Throughout Mexico, IPA is partnering with Compartamos Banco to measure interest rate sensitivity among potential and actual microfinance clients. Do lower interest rates attract more clients? How do interest rates affect loan repayment? What role do interest rates play in outreach, in terms of the socio-economic composition of borrowers? Finally, at what interest rate are profits maximized for institutional sustainability?

In this study, interest rates are randomized between 80 geographic branch groupings. Half of these branches will offer a relatively higher interest rate to loan groups, and the other half will offer a relatively lower interest rate. IPA will analyze outcomes relating to take-up rates, loan amounts, repayment rates and client retention, as well as overall profitability. In addition, socio-economic data will be collected o determine any differences among composition of borrowers between the two interest rate levels.