Borrower Transaction Cost Credit Rationing in Rural Financial Markets: The Philippine Case

This study looks at borrower transaction costs in rural ?nancial markets and its role in the rationing of credit in the Philippines. The objectives are: a) to quantify borrower transaction costs in rural ?nancial markets; b) to determine the factors that affect and are affected by the level of transaction costs; and c) to determine the role of borrower transaction costs as a credit rationing mechanism in the regulated and deregulated periods. The data set used is cross-section data from a household survey conducted in 1987 in six provinces in the Philippines. Regression analysis of the data using a simultaneous equations model was carried out, with two-stage least squares (TSLS) as the method of estimation. Three major conclusions can be drawn from the results of this study. Firstly, transaction cots play an important role in the demand for credit and in the rationing of credit among borrower classes. Second, the lifting of interest rate restrictions decreased the absolute level of transaction costs in the deregulated period compared to the regulated period - but the change was not statistically signi?cant, indicating that some barriers may be preventing its full effect. And third, transaction costs have a regressive irnpsct on borrowers, which instead of improving aiter deregulation, has proven to be of greater magnitude. A cross-country comparison was made for the Philippines and ?ve other underdeveloped countries. All six countries, including the Philippines, show a regressive transaction oost structure in relation to various loan sizes. Transaction costs as a percentage of loan amount received and as a proportion of nominal interest rate were greater for small loans and smaller for medium and large loans. For the Philippines, this regressive structure became more pronounced in the deregulated compared to the regulated period.