Loanable Fund theory of interest

Loanable Fund theory of interest

The Loan able fund theory explains the determination of interest rate in terms of demand and supply of loan able fund by the microfinance operators (Jhingan, 1997). According to this theory, the rate of interest is the price of credit which determined by the demand and supply for the loanable funds.

The users for loanable funds, (microfinance) are micro entrepreneur, framers, tenants and landless poor. They borrow these funds for the purchase of capital goods, starting new business and input tools. Such borrowing is interest elastic and depends mostly on the expected rate of profit as compared with the rate of interest. The supply loanable funds comes from saving, private and individual savings are the main source of savings Urban- rural poor are the demanders of credit with the microfinance bank and the rate of interest is the major problem associated with the acquisition of loan (Khawari, 2004). The interaction between the demand and supply for loan able funds determines the price of finance (interest rate) and establish the market equilibrium. The cost of this credit (microfinance) is negatively related to its demand.