Borrower Transaction Cost Credit Rationing in Rural Financial Markets: The Philippine Case

Abstract

This study looks at borrowers transaction costs in rural financial markets and its role in the rationing of credit in the Philippines. the objectives are: a) to quantify borrower transaction costs in rural financial markets; b) to determine the factors that affect and are affected by the level of transaction costs; and c) to determine the role of borrower transaction costs as a credit rationing mechanism in the regulated and deregulated periods.

The data set used is cross-section data from a household survey conducted in 1987 in six provinces in the Philippines. Regression analysis of the data using a simultaneous equations model was carried out, with two stage least squares (TSLS) as the method of estimation.

Three major conclusions can be drawn from the result of this study. Firstly, transaction costs play an important role in the demand for credit and in the rationing of credit among borrower classes. Second, the lifting of interest rate restrictions decreased the absolute level of transaction costs in the deregulated period compared to the regulated period - but the change was not statistically significant, indicating that some barriers may be preventing its full effect. And third, transaction costs have a regressive impact on borrowers, which instead of improving after deregulation, has proven to be of greater magnitude.

A cross-country comparison was made for the Philippines and five other underdeveloped countries. All six countries, including the Philippines, show regressive transaction cost structure in relation to various loan sizes. Transaction costs as a percentage of loan amounts received and as a proportion of monomial interest rate wage greater for small loans and smaller for medium and large loans. For the Philippines, this regressive structure became more pronounced in the deregulated compared to the regulated period.