An Analysis of the Cost of Credit in Peru

This study analyzes the evolution of the components of interest rates during the 2010–2014 period in order to explain the disparity in lending rates across segments of the Peruvian credit market and the levels of those rates relative to deposit interest rates. It concludes that operating costs and credit risk are the main factors explaining the level and disparity of interest rates. Furthermore, it finds that competition has led financial institutions to become more operationally efficient across all segments. In the small and microenterprise segments, as well as the consumer segment, competition occurs among financial institutions, unlike in the wholesale business segment, where competition also comes from the capital markets. Finally, the analysis indicates that interest rates on loans denominated in soles are higher than those on loans denominated in dollars. This difference stems from the fact that dollar-denominated loans are concentrated among the lowest-risk borrowers in each segment.