The Determinants of Interest Rates in Microbanks: Age and Scale
African Governance and Development Institute WP/15/004
35 Pages Posted: 1 Mar 2015
Date Written: February 26, 2015
This study investigates the legitimacy of the relatively high interest rates charged by those microfinance institutions (MFIs) which have been transformed into regulated commercial banks using information garnered from a panel of 1232 MFIs from 107 developing countries. Results show that formally regulated micro banks have significantly higher average portfolio yields than their unregulated counterparts. By contrast, large-scale MFIs with more than eight years of experience have succeeded in lowering interest rates, but only up to a certain cut-off point. The implication is that policies which help nascent small-scale MFIs to overcome their cost disadvantages form a more effective pricing strategy than do initiatives to transform them into regulated institutions.
Keywords: Microfinance, microbanks, non-bank financial institutions, interest rates, age, economies of scale, developing countries
JEL Classification: G21; G23; G28; E43; N20
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