Risk Premium, Interest Rate Differential, and Subsidized Lending in Pakistan

Safia Shabbir, Javed Iqbal and Saima Hameed

MPRA Paper from University Library of Munich, Germany

Abstract: Episodes of monetary contraction increases the risk premium of the enterprises which results in higher effective interest rate differential between market loans and subsidized loan; making these firms more reliant on subsidized loans. Since subsidies are easier to exploit and hard to administer. This study evaluates the subsidized lending schemes of Pakistan using information on risk premium and effective interest rate differential of 174 exporting corporate firms over thirteen years (1999-2011). Our results shows that export finance schemes (EFS) helped promoting exports, while long term financing facility (LTFF) facilitated fixed capital formation of these corporate firms. Additionally, using matched sample with loan level data from eCIB, we found that during the phases of high interest rate differential enterprises substituted their short term market loans with subsidized loans (export finance); while no such substitution is observed between long term loans and LTFF.

Keywords: Risk Premium; Interest rate differential; Subsidized lending (search for similar items in EconPapers)
JEL-codes: E43 G32 H20 (search for similar items in EconPapers)
Date: 2013-06-20
New Economics Papers: this item is included in nep-cwa and nep-mac
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Citations: View citations in EconPapers (2)

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