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Transaction costs and discretionary power in the allocation of preferential credit in Mexico

Abstract:

This paper studies a preferential credit program of one of Mexico's main development banks. This program provides credit at relatively low interest rates to specially targeted producers. However, when appraising the cost of credit it is necessary to go beyond its financial cost (the interest rate) to consider also the cost of satisfying all the requirements asked to gain access to the financial resources (transaction cost). The investigation calculates the cost of fulfilling all the requirements of the contract. More than 50 sources of transaction costs (requirements) were found and classified into a few main categories. The investigation appraises the cost of satisfying every requirement and studies the magnitude and sources of the transaction costs. It uses an internal rate of return methodology to make it possible to compare the transaction cost the interest rate. Because financial intermediaries have discretional power to add or …