Sensitivity of loan size to lending rates: Evidence from Ghana’s microfinance sector

Annim, Samuel Kobina (2009): Sensitivity of loan size to lending rates: Evidence from Ghana’s microfinance sector.

Abstract

Recent evidence from the microfinance industry reveals increase in sources of funding which anecdotally links to the profits of institutions. This phenomenon has evoked concerns for the responsiveness of the poor to credit market operational policies such as loan pricing. This paper integrates the poor’s characteristics into a loan size equation to estimate influence on interest rate stimulus. Using data from Ghana, we test the hypothesis of loan price inelasticity using quantile regression and the interaction procedure. The quantile regression shows pronounced variations in responsiveness of loan size to interest rate changes at different percentiles. In contrast to an inverse relationship depicted between the 20th and 40th quantiles, we observe positive and fairly flat curvatures at the extremes and around the median. Motivated by this finding, the interaction procedure is employed for household poverty scores and lending rates at varied statistic to identify differences in clients’ responsiveness. The semi-elasticity of loan amount responsiveness to a unit change in interest rate is more than proportionate and significant for the poorest group. In a broader context, the need for market segmentation based on socio-economic well-being is suggested in the paper in pursuance of the ‘win-win’ objective of poverty reduction and financial sustainability.

• Item Type: MPRA Paper
• Language: English
• Keywords: Interest rate; sensitivity; loan; size; poor; microfinance; Ghana
• Subjects: I - Health, Education, and Welfare > I3 - Welfare, Well-Being, and Poverty > I30 - General; G - Financial Economics > G2 - Financial Institutions and Services > G29 - Other; G - Financial Economics > G2 - Financial Institutions and Services > G20 - General

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