The relationship between commercial banks’ interest rates and loan sizes: Evidence from a small open economy


Created 22 Jul, 2000
Categories Working Papers Roland Craigwell Special Collection
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Traditional finance theory argues that as the size of a loan obtained from a financial institution increases, the interest rate on that loan rises to accommodate the increased risk associated with the loan. However, utilising firm-level data of the Barbadian banking industry, it is observed that for all six banks studied especially the small ones, the smaller the loan's size, the greater the interest rate applied, and vice versa. Using a fixed effect panel data framework, this study also shows that he interest rate differences among loan sizes can be mainly explained by the demand for smaller loans, administrative expenses and monetary policy as set by the Central Bank.

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