Reducing the transaction costs of financial intermediation : theory and innovations

Borrowing costs are large for small loans. The costs of mobilizing, lending, and recovering funds are high for financial institutions. Attention has increasingly been placed on measuring transaction costs and identifying ways to reduce them. The first section of this paper presents a conceptual framework of transaction costs for financial transactions. Empirical evidence is then summarized from several transaction costs studies of both financial institutions, and depositors and borrowers. The next section includes a discussion of ways to reduce transaction costs, using examples drawn from several developing countries. The following section outlines some ways that donors can work to reduce transaction costs. A final section summarizes the paper. (Author abstract)