The Determinants of Interest Rates in Microfinance: Age, Scale and Organisational Charter

Review of Development Economics, 22(3), pp. e135-e159 (August, 2018)

33 Pages Posted: 10 Mar 2018 Last revised: 30 Aug 2018

See all articles by Jacinta Nwachukwu

Jacinta Nwachukwu

Coventry University

Aqsa Aziz

Coventry University - School of Economics, Finance and Accounting, Faculty of Business and Law

Uchenna Tony-Okeke

Coventry University

Simplice Asongu

African Governance and Development Institute

Date Written: March 9, 2018

Abstract

This study compares the responsiveness of microcredit interest rates to age, scale of lending and organisational charter. It uses an unbalanced panel of 300 MFIs from 107 developing countries from 2005 to 2015. Three key trends emerge from the results of a 2SLS regression. First, the adoption of formal micro-banking practices raises interest rates compared with other forms of micro-lending. Second, large scale lending lowers interest rates only for those MFIs that already hold legal banking status. Third, age of operation in excess of eight years exerts a negative impact on interest rates, regardless of scale and charter type of MFI. Collectively, our results indicate that policies which incentivise mature MFIs to share their knowledge will be more effective in helping the nascent institutions to overcome their cost disadvantages compared with reforms to transform them into licensed banks. For MFIs which already hold permits to operate as banks, initiatives to increase loan sizes are key strategic pricing decisions, irrespective of the institution’s age. This study is original in its differentiation of the impact on interest rates of regulations which promote formal banking principles, credit market extension vis-à-vis knowledge sharing between mature and nascent MFIs.

Keywords: Microfinance, Microbanks, Non-Bank Financial Institutions, Interest Rates, Age, Economies of Scale, Developing Countries

JEL Classification: G21, G23, G28, E43, N20

Suggested Citation

Nwachukwu, Jacinta and Aziz, Aqsa and Tony-Okeke, Uchenna and Asongu, Simplice, The Determinants of Interest Rates in Microfinance: Age, Scale and Organisational Charter (March 9, 2018). Review of Development Economics, 22(3), pp. e135-e159 (August, 2018). Available at SSRN: https://ssrn.com/abstract=3137219 or http://dx.doi.org/10.2139/ssrn.3137219

Jacinta Nwachukwu

Coventry University ( email )

Priory Street
Coventry, CV1 5FB
United Kingdom

Aqsa Aziz

Coventry University - School of Economics, Finance and Accounting, Faculty of Business and Law ( email )

Priory Street
Coventry
United Kingdom

Uchenna Tony-Okeke

Coventry University ( email )

Priory Street
Coventry, CV1 5FB
United Kingdom

Simplice Asongu (Contact Author)

African Governance and Development Institute ( email )

P.O. Box 8413
Yaoundé, 8413
Cameroon

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
28
Abstract Views
207
PlumX Metrics