Cost Of Lending Research Articles

Why do microfinance institutions charge higher interest rates than banks? The role of operating costs

Microfinance interest is at the center of debate on lending to the poor because microfinance institutions (MFIs) charge significantly higher interest than conventional banks to borrowers with no creditworthiness. We contribute to the debate by documenting that MFIs spend more than banks for every dollar of lending. It occurs because the high marginal operating cost of lending is inherent to the microfinance business model - MFIs spend more than banks to mitigate high credit risks in lending to the poor. This study shed light on MFIs’ systemic limitations in poverty alleviation as envisaged in the sustainable development goals (SDGs).

How does climate regulatory risk influence labor employment decisions? Evidence from a quasi-natural experiment

We exploit a green lending mandate as a quasi-natural experiment and estimate its effect on labor investment inefficiency of firms with high carbon risk. We document that heightened climate regulatory risk through mandatory green lending requirements motivates firms with higher carbon risk to adjust their labor investments to levels supported by economic fundamentals. We especially show that climate regulatory risk lowers labor investment inefficiency by curbing overinvestment in labor. This impact is more concentrated among firms that are more dependent on banks for liquidity, firms with severe financial constraints, and those with more institutional investors. After the green credit policy, we also observe an increase in bank lending costs and a reduction in loan maturities for carbon-intensive firms. Overall, our findings suggest that climate bank lending regulation is one of the major channels through which climate risks get embedded in labor employment decisions. In particular, green lending regulatory costs can have significant effects on corporate labor investment efficiency.

Fintech Innovation in Micro and Small Business Financing

This paper delves into the transformative role of financial technology (FinTech) innovations in facilitating financing for small and micro enterprises (SMEs), a sector historically marred by limited access to traditional financial services. Despite their significant contribution to economic growth and employment, SMEs often face substantial barriers in securing necessary capital due to stringent credit evaluations, lack of collateral, and the disproportionate costs of small-scale lending. FinTech innovations, leveraging cutting-edge technologies such as artificial intelligence, blockchain, and big data analytics, present a paradigm shift, offering more accessible, efficient, and tailored financial solutions. This study explores the evolution of FinTech, its impact on traditional banking, and its potential to bridge the financing gap faced by SMEs. Through an analysis of current financing challenges and the application of FinTech solutions, this paper highlights how digital platforms, alternative credit scoring models, and novel funding mechanisms are revolutionizing SME financing. Furthermore, it discusses the regulatory landscape, emphasizing the need for policies that support FinTech growth while ensuring financial stability and consumer protection. Looking forward, the paper outlines the anticipated trends in FinTech innovations and their continued influence on SME financing, advocating for a collaborative approach among policymakers, financial institutions, and FinTech firms to foster a more inclusive financial ecosystem. The conclusion underscores the critical role of FinTech in empowering SMEs, driving economic diversity, and promoting sustainable development.

Особливості побудови індексу циклічного ризику з використанням фільтра Ходріка – Прескотта для моніторингу та управління банківськими ризиками

The article analyzes the impact of cyclical financial risks on the economy of Ukraine using the cyclical risk index. The index is designed to monitor the current level of cyclical risks, as well as possible accumulation in the future. Timely identification of risks with the help of an innovative tool gives the regulator enough time to react and implement anti-crisis measures. In addition, the methodology of index evaluation allows you to visualize not only the index, but also its components, which facilitates the interpretation of the used tool. The dynamics of cyclical risks during economic and financial crises is considered and the importance of their analysis for macroprudential policy is noted. The assessment of the cyclical risk index was carried out using the Hodrick – Prescott filter using indicators reflecting new lending, lending volumes, as well as the cost of lending. The indicators taken into account for the assessment of the index are used separately for the sector of households and non-financial corporations. The results of the analysis showed that after the crisis of 2008–2009, the index remained elevated until the next crisis in 2014, with the gap between non-financial corporations lending to GDP remaining positive. However, before the crisis of 2014–2016, there has been an expansion of cyclical financial risks. During 2017–2023, Ukraine was facing two crises: an economic one caused by the COVID-19 pandemic and a political one related to the russian invasion. The Financial Cycle Index did not predict the accumulation of cyclical systemic risks before these crises, but indicated an increase in risks since 2019. After the russian invasion Ukrainian economy suffered a sharp downturn, but the banking system withstood the test, providing liquidity and continuing lending operations. In general, the results indicate the need for an individual approach to the analysis and management of cyclical financial risks, taking into account the specifics of each country, its context, and the particularities of the financial sector.

Transmission Mechanisms of Inflation Targeting: Analysis of Transmission Processes

The purpose of the study is an analytical review of the main theories of inflation targeting and transmission mechanism. Inflation targeting is a monetary policy strategy in which the central bank sets a specific inflation rate as the main target and makes decisions on the interest rate and other measures to achieve this goal. The insufficient capitalization of second-tier banks and the low quality of existing borrowers create difficulties in linking the structural liquidity surplus and require its sterilization by using monetary policy instruments with longer terms. As the economy recovers, the impact of the transmission mechanism on inflation will deepen. Improving the channels of the transmission mechanism by gradually eliminating constraining factors will increase the effectiveness of transferring monetary policy decisions to inflation. The effectiveness of monetary policy instruments largely depends on the effectiveness of transmission channels, through which signals of the influence of the National Bank of the Republic of Kazakhstan (NBK) on internal economic processes, including inflation, are transmitted. The measures taken by the NBK to curb inflation primarily include reducing the depreciation of the tenge by raising the base rate, which ensures the attractiveness of tenge instruments. The base rate of the NBK is the main benchmark for the cost of money and lending to the country's economy. Starting from the government and ending with small and medium-sized businesses, they attract funding based on the base rate of the NBK. This indicates the presence of serious imbalances in the functioning of certain channels of the transmission mechanism of the NBK's monetary policy, along with structural problems of the economy. Impact on inflation expectations. Inflation targeting is aimed at forming and maintaining low and stable inflation expectations among the population and entrepreneurs. Changes in inflation expectations can affect the behavior of consumers and firms, which, in turn, can affect prices and wages.

Agricultural value chain participation and farmers' access to credit in northern Ghana

PurposePromoted for its inclusivity, agricultural value chain (AVC) financing leverages social capital and mechanisms such as off-take agreements and forward contracts to reduce borrowing and lending costs and risks for both farmers and lending institutions. AVC financing has been defined as the flow of financial products and services to and among the various actors within the AVC to address constraints of production and distribution and fulfill the needs of those involved in the chain by reducing risk and improving efficiency. This paper investigates how farmers' involvement in AVC affects their access to credit.Design/methodology/approachThe authors collected primary data from 400 crop farmers in northern Ghana through a semi-structured questionnaire and analyzed the data, using the multinomial endogenous switching regression model.FindingsJoint participation in AVC increased the amount of formal and informal credit received by 64 and 78%, respectively, compared to nonparticipation. Similarly, participation in AVC horizontal linkage and AVC vertical linkage increased the amount of formal and informal credit received by 40 and 47% and 46 and 74%, respectively, compared to nonparticipation. Irrigation farming, extension visits, knowledge of AVC in the community, access to a storage facility and trust in contract farming significantly influenced farmers' participation in AVC.Originality/valueThe authors’ work offers valuable insights into how different dimensions of value chain participation can impact smallholder farmers' access to credit. This work also underscores the importance of considering both formal and informal credit sources when analyzing the outcomes of value chain participation. The findings could enable formal financial providers to identify, liaise and/or resource informal financial players such as value chain actors to supply both formal and informal credit to farmers in AVCs.

The effect of the COVID-19 pandemic on corporate trade credit financing

Using a difference-in-differences (DiD) model, this study investigates the causal relationship between the COVID-19 pandemic and trade credit financing. We find that the pandemic significantly increases trade credit financing for companies that are strongly affected by COVID-19. This may because of the increasing cost of bank lending; companies turn to more flexible and less costly alternatives as a result. A parallel trend test supports this finding. This research provides implications for corporate managers, supply chain partners, and capital market investors.

Financing Ceramic Artists and Fashion Designers in Small and Medium Scale Enterprises (SMEs) in Sekondi-Takoradi, Ghana

Small and Medium Scale Enterprises (SMEs) face numerous financial challenges in their contribution towards the socio-economic development in Ghana. As a result, most ceramic artists and fashion designers in SMEs often are confronted with global economic crisis and are unable to grow their businesses to become big firms. The general objective of the study was to investigate the funding challenges facing Ceramic Artists and Fashion designers who owned small and medium scale enterprises in Ghana as well as examined what could be done to help mitigate these challenges. The study adopted purposive sampling technique to select forty (40) respondents comprising twenty (20) ceramic artists and twenty (20) fashion designers who owned SMEs within Sekondi -Takoradi Metropolis. Questionnaires and interview schedules were developed and used to collect data from the sampled ceramic and fashion enterprises. Statistical techniques such as mean and percentages were used to analyze the data collected while descriptive analysis was used to generate graphs, charts and tables. It was established that some of the financial challenges facing ceramic artists and fashion designers in Sekondi-Takoradi metropolis included financial constraints such as raising capital in starting the business, lack of collateral, the fear of taking risk, high cost of lending, the demand for collateral by banks and micro finance as well as the delay in the processing of loans to access credit. The study concluded by recommending among others that, loan acquisition processes could be shorter and simple. Additionally, low interest and financial training could be given to the ceramic artists and fashion designers to aid them in keeping proper financial records so as to sustain their art businesses.

Investigation on the Potential Manipulation of ROBOR Interest Rates

Recently observers have expressed concerns that the ROBOR benchmark interest rates may not accurately reflect the costs of interbank lending. ROBOR rates are reference indices for variable interest loans granted to both individuals and corporate clients in Romania, but also for derivative financial contracts that has ROBOR as the underlying asset. Therefore, the impact of ROBOR’s relevance is reflected in a much wider range of financial products addressed to the population, which will bear all the changes related to its volatility. This paper examines a possible manipulation of the prices of interbank deposits. In order to evaluate the evolution of the relevant ROBOR rates from the perspective of the existence of a market manipulation behavior, for the period July 2, 2018 - April 4, 2022, two scenarios were analyzed. Firstly, the collusion between two or more participants to obtain additional financial income related to the loan portfolio indexed to ROBOR. Secondly, the collusion between two or more participants to use inside information regarding the monetary policy decisions of the National Bank of Romania (NBR). Analyzing the hypotheses of the two scenarios, we conclude that there are no indications of a possible manipulation of ROBOR interest rates by tacit agreements between participants in the Fixing or by using inside information on monetary policy decisions of the NBR.

Evolución reciente de la financiación y del crédito bancario al sector privado no financiero. Segundo semestre de 2022

Rationale. To analyse, owing to their macroeconomic implications, the conditions and volume of funding raised by households and firms and to quantify the credit risk taken on by deposit institutions via loans to these two sectors. Takeaways. • Financing conditions continued to tighten in the second half of 2022 and the transmission of market rate rises to the cost of lending accelerated. This has led to a decrease in the flow of new funding. • The bank loan stock to the resident private sector in 2022 Q3 saw a slight decrease compared with the same quarter in recent years, mainly owing to trends in the stock of loans to business activities. Non-performing and Stage 2 loans continued to decline, except in some portfolios, such as those with ICO-backed loans. • Exposures to the energy sector have a limited weight in the bank credit business in Spain, although their quality has worsened throughout 2022 and somewhat tighter credit standards have been observed.

The impact of laws and institutions on financial contracts: Evidence from relationship lending across the world

Using loan data from public firms from 40 countries, we examine the association between lending relationships and loan contract terms. We find significant variation across countries regarding the benefits and costs of banking relationships, which can be explained by the countries’ differential legal and regulatory environments. In countries with weak disclosure regulations and institutions, borrowers pay significantly higher interest rates on relationship loans. However, as countries’ disclosure regulations improve, the gap in the interest cost between relationship and transactional loans is reduced. In further corroboration of this effect, we document an improvement in the relative costs of relationship lending following a country's IFRS adoption.

WITHDRAWN: Analysis of the path to solve the rural financing problem based on "agricultural big Data + Financial Technology"

For a long period of time, due to the lack of collateral, high risks, and high bank lending costs, China's rural household financing still facing significant constraints, and the innovation of rural household financing models is relatively behind the innovation of other financial products. In order to solve the problem of rural financing difficulties, this paper combines agricultural big data technology and financial technology to construct a rural financing problem analysis system. Moreover, this paper analyzes the problems of information asymmetry between farmers and financial institutions in the current traditional and innovative financing models of farmers and financial institutions, high thresholds, and inability to take account of information asymmetry and lack of collateral for farmers, and proposes corresponding countermeasures. From the research results of this paper, we can see that the method proposed in this paper has a certain effect which are described in detail.

Financial market indicators in the context of European integration

Introduction. The application of the European experience of financial market indicators is an actual subject of research for Ukrainian scientists in connection with Ukraine's European integration aspirations. However, the conditions and realities of financial activity in Ukraine are excellent, so the tendency towards blind borrowing needs to be adjusted. The modern financial system of Ukraine is an extremely powerful component of the country's economic body, but there are many questions regarding the increase in the rate of economic instability, especially against the background of Russian military aggression. To further improve the functioning of the financial sphere, the use of financial indicators (opportunities to analyze the system) will become extremely relevant. The purpose of the paper is to investigate European indicators of the financial market that can be used in Ukraine in the conditions of compliance with the course of European integration. Research results. In the paper researched the most popular European interest rate indicators, which are used to determine the cost of long-term lending. The existence of reliable financial indicators is a key condition for the development of the financial market, which makes it possible to influence the mechanisms for determining financial risks. The paper draws attention to the prospects of financial regulation in the conditions of the Eurozone (if Ukraine joins the use of a single common currency) and the possibilities of modern standards of banking regulation. At the same time, there is a need for a strong response to fraud attempts. In particular, in the Federal Republic of Germany, contributors and the indicators declared by them are strictly controlled. Since 2016, EU countries have applied criminal liability for manipulation attempts. Conclusions. Turning to the European experience of using financial indicators is relevant for Ukraine, especially in view of European integration aspirations. However, in order to meet modern requirements, there is a need to update the regulatory and legislative framework. Specific measures for reforms can become a separate object for research.

Poverty Reduction and Growth Trust―2022

This paper presents the first set of borrowing agreements that have been finalized as part of the loan mobilization round launched in July 2021 to cover the cost of pandemic-related lending and support the self-sustainability of the Poverty Reduction and Growth Trust (PRGT). All agreements presented use SDRs in the context of SDR channeling and together provide a total of SDR 2.85 billion in new PRGT loan resources for low-income countries (LICs).

Political sentiment and syndicated loan borrowing costs of multinational enterprises

• We show that firms with higher political exposure have a higher cost of lending. • We find that multinational corporations (MNEs) can mitigate political exposure through their subsidiaries. • MNEs with a larger presence in more countries are less affected by political uncertainty. • Political uncertainty affects MNEs with a greater number of foreign subsidiaries less. International business literature widely recognizes that political forces play a crucial role in modern corporations. Yet, rare are the studies of how foreign operations mitigate the detrimental effect that firm-level political exposure has on the cost of lending. We study such channels in a sample of U.S. corporations with foreign subsidiaries in 69 countries. We proxy firm-level political exposure via political sentiment. We show that firms with a lower political sentiment (i.e., higher political exposure) have a higher cost of lending. We document that multinational enterprises with a presence in many countries, and those having an extended network of foreign subsidiaries can lower the harmful effects of increased political uncertainty. This outcome also holds in the presence of foreign economies of scale, and when multinational corporations have foreign subsidiaries in countries with higher political polarization.

Digital Lending and Loan Portfolio of the Listed Commercial Banks in Kenya

Digital lending has served to ease activities relating to the process of acquiring loans from various financial lending institutions in Kenya. Several concerns have been raised including the need to regulate the provision of digital loans to safeguard the banks from making losses and preventing customers from exploitation. Current studies have emphasized the effect of mobile lending on the Kenyan banks' financial performance. The study's general objective involved analyzing the effect of digital lending on the loan portfolio of the listed commercial banks. The project embraced a descriptive research design. The target population involved listed commercial Banks that embrace digital lending. The findings revealed that the length of digital lending had a favorable but statistically negligible influence on the loan portfolio of listed commercial banks. Also, the findings revealed that that the correlation between digital lending duration and amount of non-secured loans was positive and significant (r = 0.578, P = .000<.05). Also, the study underlined that digital lending costs (r = -0.622, P = .000<.05) had a negative and significant correlation with amount of non-secured loans.

The cost of foreign-currency lending

Lending to corporates in foreign currencies can expose banks to substantial currency risk. Using global syndicated loan data, we find that a one-standard-deviation increase in exchange rate volatility increases loan spreads somewhere in the range between 5.5 and 16.1 basis points for loans made in a currency different from the lenders’. This implies excess interest of approximately 1 to 3 USD million for loans of average size and duration. We also show that this finding is mostly attributed to credit constraints and deviations from perfect competition in international lending markets, and that borrowers can lower the extra cost by forming strong lending relationships with their banks.

Transmission mechanism of monetary policy in India - An Expost Study

The transmission mechanism of monetary policy is correlated to lending which expands aggregate demand in the economy. The banking system form an important place in the monetary policy transmission. The channels of monetary policy transmission are: Interest Rate Channel, Credit or Loan Supply Channel, Exchange Rate Channel, and Asset Price Channel. The financial prices include interest rates, exchange rates, yields, asset prices, and equity prices, and the financial quantities consists of money supply, credit aggregates, supply of government bonds and foreign denominated assets. RBI uses various monetary policy frameworks over the years which is classified as pre-monetary targeting (1947 to 1984-85), monetary targeting (1984-85 to 1997- 98), Multiple Indicators approach (1998-99 to 2014), Inflation Targeting (from 2013 onwards), and Flexible Inflation Targeting (FIT). MCLR also drastically decreased for all these banks from 2019 to 2021. The external benchmark has increased for the three types of banks from 2019 to 2021. The repo rate gives a contrast data between pre and post FIT periods. The financial system is not fully developed which is a hindrance to the transmission mechanism. The cost of lending, issues in bond market, and pandemic situation related problems requires an appropriate transmission mechanism in the monetary policy of our country.

Evaluating Regulatory Reform: Banks' Cost of Capital and Lending

AbstractWe examine the effects of regulatory changes on banks' cost of capital and lending. Since the passage of the Dodd–Frank Act, the value‐weighted CAPM cost of capital for banks has averaged 10.5% and declined by more than 4% on a within‐firm basis relative to financial crisis highs. This decrease was much greater for the largest banks subject to new regulation than for other banks and firms. Over a longer 20‐year horizon, we find that changes in the systematic risk of bank equity have real economic consequences: increases in banks' cost of capital are associated with tightening in credit supply and loan rates.

TARGETED REFINANCING OF BANKS AS A TOOL FOR ECONOMIC DEVELOPMENT

Background. In order to stimulate lending, central banks use targeted refinancing operations, which allows lowering interest rates and increase the liquidity of the banking system. Taking the current state of bank lending in Ukraine, the development and implementation of effective lending stimulation program, namely targeted refinancing operations, is a crucial for further economic development. The aim of the article is to conduct a comparative analysis of lending programs in some developed countries, identify the shortcomings of the current lending stimulation program in Ukraine and develop a concept of a mechanism to stimulate lending by monetary policy measures in Ukraine. Materials and methods. The basis for the research is general and special scientific methods. Analysis, synthesis and systematization were used to assess targeted lending approaches in some countries, identification of shortcomings of the current lending stimulation program and further development of a concept for a targeted long-term refinancing mechanism in Ukraine. Methods of analytical and logical generalizations were also used for the research. Results. Targeted refinancing operations are widely used for lending stimulation in different countries. Depending on the final goals and the state of economy, these operations may differ in their conditions. Nonetheless, the most of the countries prefer monetary policy as a main driver for lending stimulation. In spite of that, currently in Ukraine the fiscal policy was selected as a driver for lending stimulation. The paper proposes to change this approach in view of its shortcomings and to use targeted refinancing of banks instead. Conclusion. The implementation of targeted refinancing in Ukraine will help to reduce the cost of lending and stimulate the development of prioritized sectors of the economy and decrease the dollarization of the economy. Considering the bearing risks, it is proposed to limit the total amount of targeted lending operations; limit the banks allowed to participate in targeted lending; extend the list of appropriate collateral against target refinancing.