The market for loanable fund is where borrowers and lenders get together.

As with other
markets, there is a supply curve and a demand curve. In the loanable funds framework, the
supply represent the total amount that being saved in the economy while the demand curve
represents the total demand for borrowing. The supply of loanable fund comes from those people
who want to save and lend out. Lenders are consumers or firms that decide they are willing to
use some of their funds to have more available in the future. When a person saves some of his or
her income in the financial institution anytime, that income becomes available for someone to
borrow. If one deposit money in the bank rather than spending it, the bank then can lend money
to those who wants to borrow or can give loans to businesses. In this way, one can supply funds
into the loanable funds framework. On the other hand, demand for loanable funds comes from
households and firms that wish to borrow to make investments. The financial market acts as an
intermediary between the two because it is a market where those who have loanable funds can
sell to those who wants loanable funds. There are so many factors which are responsible for the
movement of demand and supply of loanable fund in Bangladesh. Anything that changes
investment demand will change the demand for loanable funds. On the same note, anything that
impact savings behavior affects the supply of loanable fund. In our study, we will briefly discuss
about the factors that are responsible for the movement of demand and supply for loanable funds
in Bangladesh.

Objective of the study:

 To determine how the demand for loanable fund and supply for loanable fund changes.
 To investigate the factors that are responsible for the movement of demand and supply
for loanable fund.

Sources of supply and demand for loanable fund:

Demand for loanable funds comes from –

1. Business firms: The majority of demand for loanable funds comes from businesses
borrowing money to purchase or make new capital goods, like inventory building. The
most significant component of overall demand for loanable funds is the market for
loanable funds for investment purposes by business firms. Clearly the rate of interest is
the price of the loanable funds needed to purchase the capital goods. It would cost
 entrepreneurs to claim loanable funds to the point that the projected net return rate on the
capital goods exceeds the interest rate. As the interest rate decreases, entrepreneurs will
find it attractive to purchase bigger quantities of capital goods.
2. Consumers or households: Another major demand for loanable funds comes from
individuals or households who want to borrow for consumption. Individuals or
households seek loanable funds when buying more than their existing income and cash
capital. In general, consumer loans are required for the purchase of durable goods such as
automobiles, refrigerators, radios, TV sets, etc. Higher interest rates would trigger some
rise in consumer borrowing.
3. Government: The government is possibly the largest creditor, especially in developing
countries. Government undertakes major industrial projects such as steel plants in
planned growth, transport companies such as shipping yards, massive multipurpose
projects such as hydroelectric projects. Even the government borrows for social welfare
programs, etc.

Supply for loanable funds comes from –

1. Savings: Individual or household savings are the main source of loanable funds. In the
theory of loanable funds, savings was analyzed in one of these two ways: first, an ex-ante
savings, i.e. savings arranged by individuals at the start of a period in the expectation of
expected profits and anticipated consumption expenditure or secondly, in the Robertson
sense, i.e. savings or the difference between the revenue of the previous period (which in
the present period is available) and the expenditure of the present era. In any case the
saved amount differs with different interest rates. Savings by individuals and households
rely primarily on the size of their income. But savings vary at various interest rates, given
the amount of income. More savings would come at higher interest rates, and vice versa.
Businesses also save, as do individuals. A part of the earnings of a business concern is
consumed as declared dividends and the undistributed or the retained part constitutes
business or corporate savings. These savings are partially based upon the current interest
rate. A high interest rate is likely to promote business savings as a supplement for loan-
market borrowings. But such business savings are also requested by the companies
themselves for investment purposes, and thus do not reach the loanable funds market.
 2. Bank credit: Another source of loanable funds is given via the banking system. Banks can
advance loans to the businessmen by creating credit capital. Banks may also raising the
sum of money by buying out their loans. The new money generated in a time by the
banks adds significantly to the loanable funds supply. The banks would usually lend more
money at higher interest rates than at lower ones, all items staying the same.

Factors:

The loanable funds market explains how the borrowing takes place. Loanable funds market is a
hypothetical market which shows how saver loans are allocated to borrowers having investment
projects. The supply of loanable funds is savings dependent. A hypothetical curve of providing
loanable funds indicates the ability to save money and bring it into a financial intermediary.
Borrowing is based on demand for loanable funds. A hypothetical curve of the demand for
loanable funds shows the willingness to borrow money to fund investment projects; as the
interest rate decreases, the amount of loans demanded will increase. The interaction between the
savings supply and loan demand determines the real interest rate and how much is being loaned
out. There are some factors which are responsible for loanable fund. These factors shift the
supply and demand curve for loanable fund to either leftward or rightward, either increasing or
decreasing it. Here, are highlighting some factors that affect the supply and demand of loanable
funds:

I. Inflation: Inflation refers to the rise in the prices of most goods and services of daily as
common use, such as food, clothing, housing, recreation, transport, consumer staples etc.
Inflation measures the average price change in a budget of commodities and services over
time. At the time of inflation, the supply of loanable fund may decrease at any interest
rate because suppliers wants to make more purchase before price rise. Because they
think, price will rise more in future so they want to purchase as much as possible and
stock in their house. On the other hand, household and business willing to borrow more
fund at any interest rate to purchase product before prices increases which reflect increase
in demand schedule that puts upward pressure as interest rate and the demand of loanable
funds increases.
II. Economic growth: At the time of economic growth demand for loanable fund increases.
Because due to economic growth, new businesses started to expand, income and
 investment are increasing which reflects more demand for loanable fund at any possible
interest rate. The increase expansion by businesses causes increase in demand schedule. It
puts upward pressure on the demand for loanable fund at any possible interest rate. On
the other hand, at the time of economic growth, supply for loanable fund decreases
because people will spend their savings to start new business as to expand the existing
one. As a result, they would not have enough money to lend.
III. Interest rate: Interest rate represents the amount that borrowers pay for loan and the
amount that the lenders receive on their savings. The total interest as an amount lent or
borrowed depends on the principal sum, the compounding frequency and the length of
time when it is sent, borrowed or deposited. There is an inverse relationship between the
demand for loanable fund and interest rate. When the interest rates are high, there is a
decrease in the quantity of new investment. At higher interest rate borrower will demand
less funds for investment but at lower interest rate borrowers will demand more funds.
There is a positive relationship between the interest rate and supply of loanable fund. At
higher interest rates lenders are willing to lend more funds to investors. Because when the
interest rate is low, there is an increase in the quantity of investment.
IV. Budget deficit: In a government budget if spending is greater than revenue, then there is a
deficit. Deficit increase the demand for loanable funds, surplus decreases the demand for
loanable funds. The logic of this point of view is that the government runs a deficit, it has
to borrow money just like everyone else. So if there is a deficit, the demand for loanable
fund will increase because the government gets in line to borrow money just like all other
borrowers. But deficit decreases the supply of loanable funds, while surplus increases the
supply for loanable fund. The logic of this point of view is that national savings include
public saving (T-G) and national savings is the source of supply for loanable funds. So
anything that makes T-G smaller (like a deficit) as bigger (like a surplus) will shift the
supply for loanable funds.
V. Seasonal influence: Seasonal influence is also responsible for the movement of demand
for loanable fund and supply for loanable fund in the present financial market of our
country. As an example, COVID-19 pandemic is running all over the world. In this
situation most of the people have lost their jobs, people are unable to run their business
and earn money. So, people have no money in their hand to lend. For this reason, in same
 situation the supply for loanable fund decreases. On the other hand, due to COVID-19
pandemic there is lockdown running is most of the cities and towns. People can’t go out
and earn their livelihood. So people are trying to borrow money to run their regular
expenses. As a result, the demand for loanable funds increases.
VI. Investment tax credits: It can shift the demand curve rightward by allowing firms to
affect their research and development costs with tax credits. Many countries offer these
credits to stimulate research and development for new products and services which
stimulates the economy. Such policy would increase the demand for loanable fund.
VII. Monetary policy: Central bank can affect the supply for loanable funds by increasing or
decreasing the total amount of deposits held at commercial bank as their depository
institutions. When central bank increases money supply, it increases supply of loanable
funds and puts downward pressure on interest rate. If central bank reduce money supply,
it reduce supply for loanable fund and puts upward pressure on interest rate and
increases. When central bank decreases money supply, it increases the interest rate which
discourage the borrowers to borrow money at a high interest rate. As a result, the demand
for loanable fund decreases.
VIII. Recession & Unemployment: If the economy is suffering a recession and high
unemployment, with output below potential GDP then it will decrease the supply for
loanable fund and increase the demand for loanable fund.
IX. Foreign flows of fund: Different country have different economic condition that influence
demand and supply of currency by changing discount rate, revenue ration and so forth.
Central bank can control the supply of loanable fund of that particular country, like larger
economic growth, inflation, etc which reflects upward and downward pressure on interest
rate.
X. Income: Income is also a factors that shift the demand and supply for loanable fund
curve. If the income of a person increases then he or she will have some extra money
after spending their expenses and there would be more willingness to lend money. So, the
supply for loanable fund increases. But if a consumer’s income decreases then they wish
to borrow to make investment which will increase the demand for loanable fund.
 Y SL2

SL

L2
L
DL2
DL
X
0

FIG: INFLATION

Y Economic growth SL

L2

L DL2

DL
0 Economic X

FIG: ECONOMIC GROWTH

 Y SL

L2

|L DL2
DL
X
0

FIG: Budget deficit