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Low Lending Rates Not a Major Factor in Cost Management

Low Lending Rates Not a Major Factor in Cost Management Low Lending Rates Not a Major Factor in Cost Management

The results of a new study in Iran shows that “wage” and “availability of bank loans” are the two major factors affecting the cost of capital in a manufacturing firm, and not the lending rate as widely believed in Iran.

Lending rate has recently decreased from 28 percent to 24 percent.

The study, titled the ‘Cost of Capital and Liquidity Requirements of Non-Financial Firms,’ was conducted by Ali Akbar Komijani, a deputy governor of the Central Bank of Iran, and Hamidreza Tabatabaei Zavareh, an economic researcher.

According to Financial Tribune sister news website Eghtesad News, one of the aims of the research was to evaluate whether the decline in the interest rate would lead to a tangible decrease in the cost of capital and whether it would help companies lower production costs and earn more profit in consequence, a hypothesis supported by many authorities.

The research, published in a quarterly journal in spring, has used panel data for 161 manufacturing companies listed in the Tehran Stock Exchange to estimate the demand for money over a ten year period (2000-2010).

The new findings proved that the interest rate decline has a “limited” role in lowering the costs of capital. “The study indicates that wages and availability of loans are more decisive factors instead,” the news website which obtained a copy of the research said.

On April 28, monetary officials reduced the interest rates arguing that it would help the struggling manufacturing sector to revive after years. The new study could be a proof for the critics who have said in recent days that the interest rate cut would worsen conditions for the commercial banks which already suffer from a lack of capital.

According to Eghtesad News, other studies conducted in the past decade also confirmed that top-down directives to cut interest rates had “little” impact on production costs.

Financialtribune.com