The relationship between commercial banks' interest rates and loan sizes: evidence from a small open economy

Traditional finance theory argues that as the size of a loan expands, the interest rate on that loan rises to accommodate the increased risk associated with the loan. However, utilizing firm-level data of the Barbadian banking industry, it is observed that the smaller the loan's size, the greater the interest rate applied, and vice versa. Using a fixed effect panel data framework, this article also shows that the interest rate differences among loan sizes can be mainly explained by the borrower's characteristics for local banks while for foreign banks, its operating characteristics were the most important factors.