Do Small Farmers Borrow Less When the Lending Rate Increases? Interest Rate Elasticity of Rice Farmers in the Philippines *

The new generation of credit programs directed at small borrowers emphasizes financial sustainability. Based on anecdotal information, proponents of cost recovery claim that raising formal lending rates would have a minimal impact on borrowing. However, rigorous evidence for this conjecture is sparse. The present study conducts an econometric test of this conjecture using data from a survey of small rice farmers from the Philippines. Alternative regression techniques tend to reject the conjecture; in particular, a regression that controls for selection effects shows a unitary elastic response of formal borrowing to the lending rate. Copyright 2009 The Author. Journal compilation 2009 East Asian Economic Association and Blackwell Publishing Ltd..