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

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  • Annim, Samuel Kobina

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.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 21280.

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Date of creation: Nov 2009
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Handle: RePEc:pra:mprapa:21280

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Keywords: Interest rate; sensitivity; loan; size; poor; microfinance; Ghana;

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  1. Beck, T.H.L. & Levine, R. & Loayza, N., 2000. "Financial intermediation and growth: Causality and causes," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125519, Tilburg University.
  2. J. D. Von Pischke, 1996. "Measuring the trade-off between outreach and sustainability of microenterprise lenders," Journal of International Development, John Wiley & Sons, Ltd., vol. 8(2), pages 225-239.
  3. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  4. Sharma, Manohar, 2000. "Microfinance," MP05 briefs 0, International Food Policy Research Institute (IFPRI).
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