Microloan Rates, Business Cycle, and Transmission Channels

61 Pages Posted: 12 Dec 2022

See all articles by Hélyoth Hessou

Hélyoth Hessou

Université de Sherbrooke; Université de Sherbrooke

Hubert Tchakoute Tchuigoua

KEDGE Business School

Abstract

Microfinance institutions (MFIs) are crucial in enhancing financial inclusion in developing countries. Nonetheless, one of their main challenges is their ability to be profitable while serving the poor and the excluded, especially during bad times. Accordingly, this study aims to determine whether the loan pricing (interest rate) that microfinance institutions (MFIs) charge responds to the business cycle, specifically, if rates are higher in bad times than good ones. Our empirical investigation consists in regressing MFIs rates on the business cycle proxy. We find a negative relationship between microfinance interest rates and the business cycle using a sample of 1,481 MFIs over 15 years (2003–2018). Further analysis suggests that the negative relation documented only concerns for-profit MFIs whose characteristics are close to conventional banks. This indicates that MFIs, mainly for-profit MFIs are likely to increase their real rate during times of stress. An analysis of potential attenuation mechanisms of the cyclical effects suggests that MFIs using proximity lending methodology, or those that benefit from subsidies, are less cyclical and could better intermediate through the cycle. Our findings are robust to several specifications, including the dynamic GMM estimation and propensity score matching (PSM).

Keywords: Business cycle, Microfinance, Microloan pricing, Group lending, Subsidy.

Suggested Citation

Hessou, Hélyoth and Hessou, Hélyoth and Tchuigoua, Hubert Tchakoute, Microloan Rates, Business Cycle, and Transmission Channels. Available at SSRN: https://ssrn.com/abstract=4299804 or http://dx.doi.org/10.2139/ssrn.4299804

Hélyoth Hessou (Contact Author)

Université de Sherbrooke ( email )

Sherbrooke, Québec J1K 2R1
Canada
J1K 2R1 (Fax)

Université de Sherbrooke ( email )

2500, boulevard de l'Université, Ecole
de gestion, Campus principal (Pav K1)
Sherbrooke, Québec J1K 2R1
Canada
J1K 2R1 (Fax)

Hubert Tchakoute Tchuigoua

KEDGE Business School ( email )

Domaine de Luminy - BP 921
BP 921
Marseille, PACA 13288
France

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