 The determinants of the lending interest rate in a cost-based approach: Theoretical model and empirical analysisSerge Patrick Amvella Motaze The Quarterly Review of Economics and Finance, 2022, vol. 83, issue C, 36-51 Abstract: We develop a mathematical model to determine the lending interest rate applied by a financial institution in a cost-based approach. Our model mathematically isolates the four main components of the total cost of credit, including net operating costs, weighted average cost of funding, cost of risk and weighted cost of equity. Our equations enable us to determine the floor interest rate, which is the minimum interest rate that a financial institution should set for its credit operations to be profitable. The results of the empirical analyses carried out over a 15-year period, from 2004 to 2018, corroborate the suggestions of our model that interest rates follow the evolution of the floor interest rate. One of the contributions of our model is that the results can be useful in policies that seek to improve the credit conditions of financial institutions by reducing their credit costs rather than imposing low interest rates to them. Keywords: Interest rates; Credit costs; Financial institutions; Microfinance (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:83:y:2022:i:c:p:36-51 DOI: 10.1016/j.qref.2021.10.003 Access Statistics for this article The Quarterly Review of Economics and Finance is currently edited by R. J. Arnould and J. E. Finnerty More articles in The Quarterly Review of Economics and Finance from Elsevier |
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