Heterogenous Effect of Relationship Variables on Microfinance Lending: Evidence from Indonesia

Abstract

Microfinance and SMEs have significant roles as economic growth drivers. However, interest rate and credit availability for SMEs depend on various factors. This research tries to find the impact of having a relationship between the Microfinance Institution (MFI) and the borrowers as the deciding factor for interest rate charge and the percentage of approved loan applications. By utilizing cross-sectional survey data of 1001 ultra-microloan borrowers in Indonesia during 2018 from five MFIs, it is found that relationship lending, as proxied by duration of relationship between the MFI and the borrower, does not have significant influence on the interest rate setting but does have a significantly positive influence on credit availability, especially for borrowers with an at least five-year relationship duration. Meanwhile, having previous credit history with a bank actually increases interest rate significantly and reduces credit availability.