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The determinants of interest rates in microfinance: Age, scale and organizational charter

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  • Jacinta C. Nwachukwu
  • Aqsa Aziz
  • Uchenna Tony‐Okeke
  • Simplice A. Asongu

Abstract

This study compares the responsiveness of microcredit interest rates with age, scale of lending, and organizational charter. It uses an unbalanced panel of 300 microfinance institutions (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 microbanking practices raises interest rates compared with other forms of microlending. Second, large‐scale lending lowers interest rates only for those MFIs that already hold legal banking status. Third, age of operation in excess of 8 years exerts a negative impact on interest rates, regardless of scale and charter type of MFI. Collectively, our results indicate that policies that incentivize 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 that 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 that promote formal banking principles, credit market extension vis‐à‐vis knowledge sharing between mature and nascent MFIs.

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  • Jacinta C. Nwachukwu & Aqsa Aziz & Uchenna Tony‐Okeke & Simplice A. Asongu, 2018. "The determinants of interest rates in microfinance: Age, scale and organizational charter," Review of Development Economics, Wiley Blackwell, vol. 22(3), pages 135-159, August.
    • Handle: RePEc:bla:rdevec:v:22:y:2018:i:3:p:e135-e159
    DOI: 10.1111/rode.12402
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    Cited by:

    1. Djibril Faye & Zaka Ratsimalahelo, 2022. "Dynamic analysis of the interest rate determinant in microfinance institutions," Working Papers 2022-09, CRESE.
    2. Elikplimi K. Agbloyor & Simplice A. Asongu & Peter Muriu, 2021. "Sustainability, Growth and Impact of MFIs in Africa," Working Papers of the African Governance and Development Institute. 21/083, African Governance and Development Institute..

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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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