INTEREST RATE POLICIES AND BORROWING COSTS IN RURAL FINANCIAL MARKETS

Hidden costs are an important feature of credit transactions in rural financial markets of lesser developed countries. There is frequently a trade-off between explicit interest charges and implicit borrowing costs such that smaller borrowers experience relatively greater borrowing costs than larger borrowers in a low, subsidized interest rate setting. - Implicit interest and explicit interest are found to be perfect substitutes, and lending institutions exercise loan rate differentiation through implicit charges to borrowers. Changes in the explicit interest rate have a differential impact by loan size