Credit cooperatives are more than just bank substitutes

TOPIC 15-STAGE 4-MESO Traditional literature relies on neoclassic microeconomic theory to say that Cooperative Financial Institutions (CFI) and commercial banks compete directly for the same customers, even tough these... [ view full abstract ]

TOPIC 15-STAGE 4-MESO Traditional literature relies on neoclassic microeconomic theory to say that Cooperative Financial Institutions (CFI) and commercial banks compete directly for the same customers, even tough these segments are distinct by nature. This study aims to access the effect of CFI local presence on bank interest rates. A negative correlation indicates that cooperative institutions are important to market discipline. Otherwise, we need to look deeper into CFI distinctive characteristics by the lens of a different theoretical framework. Our empirical model is a pooled cross section of bank interest rate as a function of CFI market share, competition, operation and county characteristics. We look at four quarters of 2013. Data on the lending operations are in Brazilian Central Bank Credit Information System, and municipal indicators are in 2010 demographic census. Looking at the relationship of interest at local level and using less aggregated data than previous studies, we found no evidence of significant negative impact of higher CFI presence on banks interest rates. On the other hand, dummies for the largest banks were the most important variables on determining interest rates. Furthermore, Municipal Human Development Index (HDI) was negative correlated with interest rates. Results show that is necessary to look at the relationship between CFI and banks beyond traditional literature on banking competition. Their differences mean regulators should not treat them the same way. Empowering population should be a main goal of government.