Transaction costs of credit to the small-scale sector in the Philippines

World Bank Reprint Series: Number 226 Katrine Anderson Saito and Delano P. Vilianueva Transaction Costs of Credit to the Small-Scale Sector in the Philippines Reprinted with permission from Economic Development and Cultural Change, vol. 29, no. 3 (April 1981), pp. 631-40. Copyrighted by the University of Chicago Press.  Transaction Costs oL Credit to the Small-Scale Sector in the Philippines* Katrine Anderson Saito World Bank Delano P. Villanueva International Mionetary Fund I. Introduction In discussions on the cost of credit in less developed countries, emphasizing the level and structure of rates paid by financial institutions on their liabilities, attention is seldom focused on transaction costs of lending for want of relevant information. This study is a modest attempt at presenting estimates of the transaction costs of lending to the small-scale sector by different financial institutions in a developing country, the Philippines. This country has been selected, first, because there has recently been a major effort to promote the growth of the small-scale sector, and in con- sequence a complex network of lending channels and institutions has been developed, and, second, because adequate data are available. Transaction costs of lending consist of the cost of administering credit and the cost of the risk of default. Administrative costs are those which are directly attributable to the processing, delivering, and ad- ministering of loans. In percentage terms, costs of administration are expected to rise as the size of loans falls, the duration of loans shortens, and accounting services are expanded in order to cope with a large number of small-scale borrowers. Costs of risks and defaults incorporate an ele- ment to cover losses through default. The more careful the loan appraisal, $ This paper is a by-product of a joint World Bank-IMF research project on the costs of lending by financial institutions in developing countries. The authors are economist and senior economist, respectively, with the World Bank and the International Monetary Fund. They are grateful to D. R. Khatkhate of the IMF for suggestions and help in preparing this paper; V. V. Bhatt, L. Hinkle, C. Poortman, F. Khambata, and others of the Projects and Country Programs Department of the East Asia and Pacific Region, World Bank, for valuable comments; A. Moustapha of the IM F for computa- tional assistance; C. OBrien of the IMF for editorial assistance; and the anonymous referees for many constructive criticisms of an earlier draft. The views expressed in no way implicate the organizations where the authors are presently employed.