The summary statistics in appendix Table A.1 show considerable variations in both MFI coverage and informal interest rates. The average informal interest rate in our sample villages is about 19 percent. This might seem low when compared to some of the estimates reported for informal interest rates in South Asian countries for earlier periods.<sup>23</sup> However, it is comparable to the recent estimate for West Bengal reported by Maitra et al. (2013) (25 percent average). It is important to appreciate that the extremely high moneylender interest rates reported in the press and many earlier studies refer primarily to short-term consumption loans taken to tide over a few weeks or months during the lean season.<sup>24</sup> We also divide villages into quartiles in terms of MFI coverage rate. The average interest rates are comparable across the three lower quartiles, but rise to 27 percent for the topmost quartile. Note that the moneylenders charge interest on loans at a flat rate, and thus the effective interest rate is much higher when the declining balance over time is taken into account; a 27 percent flat rate is approximately equal to a 60 percent effective rate, assuming that the repayment schedule is similar to a standard MFI loan product.<sup>25</sup> As is widely discussed in the microcredit literature, MFIs also calculate flat rate interest and thus the rates are comparable to the moneylender interest rates. The average interest rate charged by MFIs in Bangladesh has been around 15 percent (flat rate) in recent years, according to CGAP. Estimates based on data from Credit and Development Forum for the year 2000 show that 80 percent of MFIs in Bangladesh charge 1115 percent interest rate, and about 1 percent charges more than 20 percent (Rahman (2003)). Starting from July 2004, the wholesale microcredit fund provider PKSF capped the interest rate at 12.5 percent flat.

The average MFI coverage rate is about 42 percent in our sample of villages (Table A.1) which is comparable to coverage rate from our panel data (38 percent). According to the Household Income and Expenditure Survey (HIES) 2010, about 45 percent of households with less than an acre of land in the Rangpur division covering areas included in our sample are active borrowers from MFIs. The summary statistics for all other variables used in the regression are also reported in Table A.1.

# **2.4. OLS, MATCHING AND IPW ESTIMATES**

We start with the simplest specification where the moneylender interest rate is regressed on the MFI coverage dummy (D=1 if coverage in a village is more than the mean coverage rate) without any

> 23 According to one estimate reported in late eighties, the average interest rate charged by moneylenders was 51.86 percent in rural India (Dasgupta, 1989); Aleem (1993) reports an average lending rate of 78.5 percent in Pakistan. For a summary of the evidence on informal interest rates in developing countries see Banerjee (2003).

> 24 It is not uncommon to have 25-50 percent interest rate for a consumption loan for a month, which becomes extremely high interest rates when annualized. Most of the moneylender interest rates reported in the literature are annualized rates on short term consumption loans.

> 25 Note, however, that it assumes that the repayment schedule is enforced strictly, which is unrealistic, for both the moneylender loans and MFI loans.

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