Dynamic analysis of the determinants of long-term microfinance interest rates: Macro and micro factors

Fawad Rauf; Wang Wanqiu; Li Jing; Syed Usman Qadri; Khwaja Naveed; Shams U Rahman

doi:10.3389/fpsyg.2022.1008002

Dynamic analysis of the determinants of long-term microfinance interest rates: Macro and micro factors

Front Psychol. 2022 Nov 30:13:1008002. doi: 10.3389/fpsyg.2022.1008002. eCollection 2022.

Authors

Fawad Rauf¹, Wang Wanqiu¹, Li Jing², Syed Usman Qadri³, Khwaja Naveed⁴, Shams U Rahman⁵

Affiliations

¹ College of Economics and Management, Beijing University of Technology, Beijing, China.
² LinKong School of Economics and Management, Beijing Institute of Economics and Management, Beijing, China.
³ School of Management, Jiangsu University, Zhenjiang, China.
⁴ Riphah School of Leadership, Faculty of Management Sciences, Riphah International University, Islamabad, Pakistan.
⁵ Faculty of Management, University of Agriculture, Peshawar, Pakistan.

Abstract

Introduction: A recent increase in interest rates has raised doubts about the stability of micro-finance institutions (MFI) A recent increase in interest rates has raised doubts about the stability of MFI in many countries. This has compelled governments to consider some MFI practices unethical.

Methods: This paper studies the MFI interest rates by using a dynamic panel method to identify the determining factors of the viability, financial, and social execution of microfinance firms. The research shows that the long-term interest rate evolution depends on the anticipation of loan loss rates (LLR), profit, or macroeconomic factors like inflation and the short-term current interest rate. The Study used database of 897 microfinance institutions in 106 countries and six geographic regions with a representative sample size of 5,075 observations between 2008 and 2020. The external factors considered are the market structure (Competition), economics (inflation), cultural and technological political conditions, and banking regulations in effect (regulation). Financial costs, operational costs, the write-off rate, and the average size of the loan are the most important determinant factors in MFI interest rate fluctuations.

Results: The research find that other factors like gender, legal status, and regulations also contribute to the MFI interest rate variation. The research also discovered that there is a threshold effect in the relationship between women borrowers (WB) and the interest rate. Another important finding of this study is that MFIs do not anticipate inflation in the definition of the interest rate.

Discussion: From an institutional point of view, it is necessary to promote competition, as the study shows that well-regulated competition helps to keep interest rates at a reasonable level.

Keywords: GMM; dynamic analysis; interest rate (E43); macro and micro; microfinance.