Firm-specific Characteristics and Microcredit Pricing: Evidence from Sub-Saharan Africa

Abstract

This research explores the key factors that drive the high interest rates observed in microfinance institutions (MFIs) by focusing on the effects of firm-specific characteristics in the context of MFIs from Sub-Saharan Africa (SSA). The study utilizes data from 129 MFIs in SSA from 2004 to 2018. Random-effects GLS regression is employed as our main method of data analysis. The study unveils that operating inefficiency and capitalization drive interest rates positively, whereas higher loan intensity and loan officer productivity are negatively associated with microcredit interest rates. Moreover, we find that MFIs with higher credit risk in the previous period tend to reduce interest rates in the current period, possibly to reduce the total debt burden for the borrowers and improve repayment rates, or alternatively, due to shifts to more creditworthy borrowers. Nevertheless, our study is unable to find any evidence of discrimination against women via charging higher interest rates. The results are robust regardless of whether the MFIs are large-scale or small- and medium-scale MFIs, except for loan officer productivity and credit risk, which hold valid only for small- and medium-scale MFIs but not for large-scale MFIs. Our findings have several considerable implications for how MFIs could provide more affordable microcredit for the poor. More specifically, MFI managers need to reduce operating inefficiencies, invest more of their assets in loan portfolios, improve loan officer productivity, and expand the scale of MFI operations through debt leverage to reduce interest rates.