Research On The Pricing Model Of Microcredit Based On Stochastic Frontier Analysis (SFA) Method

Microcredit refers to the short-term quasi-credit loans with small amounts provided to farmers, individual industrial and commercial households, as well as micro-entrepreneurs. It stays focused on the market-oriented methods dealing with the problem of high costs and high risks, paying great attention to the sustainability and profitability of microfinancing institutions. Pricing by market-oriented methods is the inevitable choice for the smooth development of the microcredit business. There are two connotations of market-oriented pricing:on the one hand, the interest rates are decided entirely by the market rather than the policies; on the other hand, the interest rates are decided both by suppliers and demanders rather than decided by only one side. The competition is getting more and more fierce and the consumers’bargaining power increases during the period when the microcredit market is transforming from the stage of development to expansion. Thus the institutions must pay more and more attention to the balance between enhancing profitability and expanding the market shares. The Stochastic Frontier Analysis (SFA) Method can be applied in the field of microcredit pricing with the technical non-efficiency items standing for the bargaining power of the consumers. Perhaps this is an effective channel to introduce demanders’ factor into the pricing model of microcredit business.This paper defines the concept of microcredit and its elements at the beginning, trying to revealing the reality that the commercial nature and essential characteristics of microcredit form the internal fundation of its market-oriented pricing while the market phase changing from the stage of development to expansion constitutes the external condition of its market-oriented pricing. The new microcredit pricing model is committed to coordinating suppliers and demanders. Secondly this paper presents an brief introduction of the Stochastic Frontier Analysis (SFA) Method, proposes the principles and processes applying this theory in microcredit pricing. On this basis we try to determining the inputs and outputs of microcredit, designing the calculation methods of each factor in order to construct the deterministic part inside the stochastic frontier production function. Then we conduct the empirical analysis using the sample data to obtain the specific pricing model and price for new microcredit business with this model. Through the comparison between the results of the new model and other pricing methods can we come to the conclusion that the pricing model based on Stochastic Frontier Analysis (SFA) Method can effectively satisfy the expected objectives of microcredit pricing. At the end of the paper is a summary of the main conclusions and the outlook of reserch directions in the future.