FIXING OF INTEREST RATES IN THE INFORMAL FINANCIAL SECTOR IN GHANA: ANALYSIS OF DETERMINANTS AND TRENDS

Abstract

The factors that go into the determination of lending rates in the informal financial sector, are little unknown. This study sought to capture the trend of lending rates in the informal credit market in Ghana and to examine the determinants of the rates operating in the market. The study established that the most critical factor informal institutions consider in interest rate determination is the commercial rate, followed by operational costs, the philosophy of the organisation and the risk associated with the borrower. With regard to microeconomic indicators, it was observed that the real effective exchange rates, consumer price index, do influence the fixing of informal lending rates. The role of these factors especially the commercial rate in the determination of informal interests rates in the informal financial sector confirm the strong linkages existing between the formal and informal financial markets in Ghana and other developing countries.