DOI: 10.5176/2251-2055_MME1246
Authors: Masagus M. Ridhwan
Abstract: This paper explores the determinants of regional differences in the rates of return to capital (interest rates) in an emerging market economy, Indonesia. Based on a simple loan pricing model, we aim to investigate whether risk, cost, market concentration and scale economies jointly determine the bank’s interest rates, controlling for region-specific factors. Using the data of the local bank loan markets, we find that regional interest rate variations are positive and significantly affected by the bank's risk factor, the operating costs, and market concentration. Scale economies also shows a significant result with a negative effect to the interest rates. These findings also provide alternative explanations for the empirical evidence concerning the issue of geographical segmentation in bank loan markets.
Keywords: Interest Rates, Finance in Urban and Rural Economies.
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