Microcredit is predominantly perceived to have the purpose of providing access to credit
to poor and otherwise marginalized clients. However, for quite some time there is
criticism over its ‘high’ interest rate that is expected to impact negatively on borrowers’
demand. This paper examines whether the microcredit demand in Bangladesh is sensitive
to interest rate by adopting a simple stochastic demand equation. By using the
Household Income and Expenditure Survey (HIES) 2010 data of Bangladesh
Bureau of Statistics, the study estimates the demand equation for the households
that borrow micro loans from various sources. The initial regression results
reveal that interest rate has negative and statistically significant impact of the size
of loan while frequency of payment shows the opposite impact in all models. At
the second stage, interest rates were disaggregated by broad sources, which show
that interest rate of the big microfinance institutions has negative and significant
effect on amount of borrowing in all models, while the same of the other sources
including bank and government departments demonstrate mixed effects. Finally,
disaggregating size of loan for broad sources, the study reveals mixed effects of
interest rate.