Sensitivity of Loan Size to Lending Rates: Evidence from Ghana's Microfinance Sector
This paper integrates characteristics of the poor into a loan size equation to estimate its influence on interest rate stimulus.
Recent evidence from the microfinance industry reveals increases in funding sources that anecdotally link to institutional profits. This phenomenon has evoked concerns for the responsiveness of the poor to credit market operational policies such as loan pricing. Using data from Ghana, the paper tests the hypothesis of loan price inelasticity using quantile regression. Findings reveal that:
- Pronounced variations are seen in responsiveness of loan size to interest rate changes at different percentiles;
- Inverse relationship is observed between the 20th and 40th quantiles;
- Positive and fairly flat curvatures are observed at the extremes and around the median.
Motivated by this finding, the study uses the interaction procedure for household poverty scores and lending rates 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 paper suggests market segmentation based on socio-economic well-being, while pursuing the objectives of poverty reduction and financial sustainability.
