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Microfinance Interest Rate Puzzle: Price Rationing or Panic Pricing?
Author(s) -
Guo Lin,
Jo Hoje
Publication year - 2017
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 2041-9945
DOI - 10.1111/ajfs.12167
Subject(s) - endogeneity , economics , loan , interest rate , monetary economics , microfinance , collateral , ceteris paribus , microeconomics , econometrics , macroeconomics , finance , economic growth
We examine the relation between microfinance institution ( MFI ) interest rates, loan loss rates, and regulations. Our results suggest that a positive and causal association exists where loan loss rates drive MFI interest rates after controlling for confounding factors. This positive association holds after accounting for potential endogeneity based on various econometric methods and quasi‐natural experiment. Although endogeneity cannot be ruled out fully, the results of our tests suggest it plays a limited role. Our results support the price‐rationing proposition that MFI s ration credit and there is unmet demand at the market‐clearing price. This positive relation is more pronounced in countries with individualistic and uncertainty avoiding cultures.