Factors affecting loan interest rates

Abstract

I realize that some country’s lending interest rate is much higher than developed countries. The social and economic development of a country determines how interest rates are set. High interest is not worthless for lenders, commercial banks, and that country’s economy. The country with the highest value in the Asia is Tajikistan, middle is Mongolia and the lowest is Japan. We choose these countries to know how their interest rates are settle, and why Japanese benchmark interest rate is low. Then, what factors are effective for lending interest rate? In this paper, know how much affects do world inflation, that country’s inflation, exchange rates, foreign exchange reserves, deposit interest rate in lending interest rates; after explain how to reduce lending interest rate.

Factors affecting interest rates are:

• Inflation

• Deposit interest rate

• Exchange rate

• Total reserves

• GDP

• Bank’s operation cost

• Bank’s contingency fund

• Other

In this research we are more concentrated on first 5 factors due to data available. According to our research, for reduce lending interest rates, that country have to (1) reduce the inflation rate, (2) control the expectation of lending interest rate, (3) reduce deposit interest rate, (4) reduce exchange rate, (5) increase total reserves, and (6) increase GDP. Ironically, total reserves and gross domestic product seem to have little effect on lending rates, but they are the most influential.