Publication: Brazil : Interest Rates and Intermediation Spreads
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2006-07-07
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2006-07-07
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This study sheds light on the analytical and policy issues regarding the high intermediation spread in Brazil, focusing on its determinants, the reasons for its persistence, and its impact on the real economy, especially on access to finance for Brazilian firms. The key contention of the analysis is that high intermediation spreads are a symptom of underlying problems; as such, spreads constitute a window that, when open appropriately and under the right analytical light, can unveil deeper issues concerning the Brazilian financial system, its functioning, and its linkages to economic performance. The study's major contribution is to investigate the level of intermediation spreads in Brazil from macro, micro, and international perspectives. In particular, the international perspective compares the Brazilian financial system with industrialized countries and Latin American peers to provide a background for the analysis, and highlight the areas where Brazil appears to be special.
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“World Bank. 2006. Brazil : Interest Rates and Intermediation Spreads. © http://hdl.handle.net/10986/21461 License: CC BY 3.0 IGO.”
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These rates are higher, often much higher, than normal bank rates, mainly because it inevitably costs more to lend and collect a given amount through thousands of tiny loans than to lend and collect the same amount in a few large loans. Higher administrative costs have to be covered by higher interest rates. Many people worry that poor borrowers are being exploited by excessive interest rates, given that those borrowers have little bargaining power, and that an ever-larger proportion of microcredit is moving into for-profit organizations where higher interest rates could, as the story goes, mean higher returns for the shareholders. Section one looks at the level and trend of micro lenders' interest rates worldwide, and breaks them out among different types of institutions (peer groups). Section two examines the cost of funds that micro lenders borrow to fund their loan portfolio. Section three reports on loan losses, including, worrisome recent developments in two large markets. 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