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The Liquidity Premium: Commercial Banks versus Microfinance Institutions

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  • Carolina Laureti
  • Ariane Szafarz

Abstract

Using data from Bangladesh, this paper finds that the liquidity premium—the difference between the interest paid on illiquid and liquid savings accounts—is higher in commercial banks than in microfinance institutions. One possible interpretation lies in the higher prevalence of time-inconsistency among the poor. The observed difference in liquidity premia could be due to poor time-inconsistent agents willing to forgo interest on illiquid savings accounts in order to discipline their future selves.

Suggested Citation

  • Carolina Laureti & Ariane Szafarz, 2014. "The Liquidity Premium: Commercial Banks versus Microfinance Institutions," Working Papers CEB 14-029, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:sol:wpaper:2013/178272
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    References listed on IDEAS

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    1. Stijn Claessens & Luc Laeven, 2004. "What drives bank competition? Some international evidence," Proceedings, Federal Reserve Bank of Cleveland, pages 563-592.
    2. Stefano DellaVigna & Ulrike Malmendier, 2004. "Contract Design and Self-Control: Theory and Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 119(2), pages 353-402.
    3. George Clarke & Robert Cull & Maria Soledad Martinez Peria & Susana M. S·nchez, 2003. "Foreign Bank Entry: Experience, Implications for Developing Economies, and Agenda for Further Research," World Bank Research Observer, World Bank Group, vol. 18(1), pages 25-59.
    4. Agier, Isabelle & Szafarz, Ariane, 2013. "Microfinance and Gender: Is There a Glass Ceiling on Loan Size?," World Development, Elsevier, vol. 42(C), pages 165-181.
    5. S. Dellavigna., 2011. "Psychology and Economics: Evidence from the Field," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 5.
    6. Michal Bauer & Julie Chytilova & Jonathan Morduch, 2012. "Behavioral Foundations of Microcredit: Experimental and Survey Evidence from Rural India," American Economic Review, American Economic Association, vol. 102(2), pages 1118-1139, April.
    7. Carolina Laureti & Ariane Szafarz, 2014. "Having it Both Ways: A Theory of the Banking Firm with Time-Consistent and Time-Inconsistent Depositors," Working Papers CEB 14-011, ULB -- Universite Libre de Bruxelles.
    8. Pascaline Dupas & Jonathan Robinson, 2013. "Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya," American Economic Journal: Applied Economics, American Economic Association, vol. 5(1), pages 163-192, January.
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    11. Esubalew Assefa & Niels Hermes & Aljar Meesters, 2013. "Competition and the performance of microfinance institutions," Applied Financial Economics, Taylor & Francis Journals, vol. 23(9), pages 767-782, May.
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    More about this item

    Keywords

    liquidity premium; time-inconsistency; banks; microfinance; Bangladesh;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G00 - Financial Economics - - General - - - General
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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