The nexus between microcredit nominal interest rates and inflation in sub-Saharan Africa: evidence from panel vector autoregression analysis
This paper investigates the dynamic effect of microcredit nominal interest rates and inflation, using a panel data of 315 microfinance institutions from 34 sub-Saharan African (SSA) countries over the period 2003 to 2011. To do so, we employ a panel vector autoregression (PVAR) model using efficient generalized method of moments (GMM) estimation as proposed by Blundell and Bond (1998). Apart from the full sample estimation, we further group our countries into three different income groups. Overall, the full sample estimation suggests that there is a negative relationship between inflation and microcredit nominal interest rates. The causality runs from inflation to microcredit nominal interest rates, whereas the reverse does not hold. Furthermore, the forecast error variances after 10 years have very low explanatory power for both microcredit nominal interest rates and inflation. Far more importantly, the significance of our study findings supports the Fisher effect (Fisher, 1930) and that microfinance lenders incorporate inflation into the microcredit interest rates. Additionally, moderation of persistently high inflation in the SSA region, ceteris paribus, could undoubtedly contribute to lowering the microcredit interest rates in SSA.