Why are interest rates higher in rural than in urban markets?

Because of the higher risk of default.
62% (37 votes)
Because of imperfect competition.
38% (23 votes)
Total votes: 60

Comments

In the rural there are very few money lenders, only what the rural market can absorve and are much less than the urban ones.

People in the rural cannot move to urban lender because the proximity and the knowledge the lender have of the work is very important.

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It is more expensive because rural incomes are highly susceptible to systemic risks , such as bad weather and disease, and cyclical and seasonal fluctuations in prices of agricultural products. The loss of expected income has significant impact and reduces savings and the ability to obtain credit. Revenues of investment capital are low and profit margins are often very low. Operating costs are high in remote areas and , as often there is no guarantee , lenders are more at risk of the loans are not paid . Lack of knowledge reduces the ability to adopt new technologies , which affects both productivity and competitiveness in the market. Social exclusion also limits the production and effectiveness in the marketplace .

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Banks rely on trust to give money . Interest in rural are higher due to the risk of not returning the money. In rural areas influence factors such as weather forecasting, which affects crops and can destroy them . In the city moves more money and is easier to work and repay the loan guarantees.

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Even though both are causes to higher interest rates in rural markets, I think the imperfect competition is the most important one.

Usually rural lenders are a few people that know whom they are learning the money. For that reason, in case of not receiving their money back on time, they know how to control the situation and see to recovering what they lent somehow. Urban lenders do not work in the same way. This leads to higher distrust, so they are more careful lending money, and at higher rates. What can be deduced as a conclusion is that greater risk of default, in this case, causes imperfect competition, being this second concept above the first one. 

In addition, the fact that there are few rural lenders decreases the competition. So they can impose higher rates since farmers won't have many more options (this is also imperfect competition).  

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Interest rates on home mortgates tend to be higher in rural areas than in urban. Those differences may reflect both expenses associated with mortgage lending and the competitiveness and efficiency of mortgage markets. The smaller size and greater remoteness of many rural areas can raise lender costs. Additionally, rural financial markets, including mortgage markets, generally
have fewer competitors than urban markets do. Thus, lenders may be apt to charge more, to provide fewer products and services, or to incur inefficiently high expenses.
Banks in less competitive markets have been shown to operate this way. Differences between rural and urban rates probably reflect both mortgage market efficiency (including competitiveness)
and the costs and risks associated with mortgage lending.

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Interest rates are higher in rural markets because the chance to get money back is higher in the cities, so the higher rates compensate this risk. There are a lot of reasons to support the existence of this risk, for example, the bigger number of jobs in urban areas or the existent huge difference between the repayment rates in both areas. 

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the reason for higher interest rate is high risk not to get money back. in rural area the income is not stable. it is not determined by boss, who pays the salary on time. but it depends on harvest, season and many other factors

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Both the greater risk of default and the imperfect competition seems to be posible causes of why the interest rates are higher in rural markets than in urban markets. Nevertheless, the imperfect competition might be the most direct cause. 

In rural areas there is usually only one or very few money lenders instead of many. People know each other and decide which one is the most interesting in their opinion. Therefore, the money lenders have more freedom deciding which rates can be applied. Also, the resources are limited so there is also a greater risk of default in rural areas.  

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In our today´s world we can not say that de rural world is so efficient as the urban, wich means that is more dangerous for a bank or someone who rents money to give it to a rural corporation than to give it to an urban corporation. Hence, a rural corporation has to pay higher interests rates, its just for the risk.

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If rural credit markets would be perfectly competitive this question would make no sense. Hence, in the developing world, the higher interest rates practiced by formal or informal lenders relate to a series of factors. Formal lenders like government, rural banks, credit agencies, etc. practice such rates mostly because of the informational constraints ( informational gaps that occur at two levels, first regarding the use of the loan, second regarding the repayment decision - the risk of default, of any kind ). Informal lenders like landlords, shopkeepers, traders, etc. practice a different aproach in rates setting, considering, besides the informational constraints, the factor of segmentation ( most of the times moneylenders serve a unique clientele, built in time and with trust, which comes from their community or from nearby ), the interlinkages ( lending money not being their principal occupation, most of the times the lending takes place on the occupational lines or in the production relationship ), the rationing of the credit or the exclusivity of it ( most of the lenders do not accept their borrowers to take loans from others ). However, high interest rates are not a norm in the informal transactions, they can depend also on the personal relationship with the borrower.       

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