Effects of Interest Rate Caps on Financial Inclusion

Abstract

In this paper we study the liberalization of the microcredit usury rate in Colombia and its effects on loan expansion. Namely, in February 2007 the interest rate ceiling for microcredit loans was lifted and fixed to 33%, while the ceiling of all other loans remained unchanged and close to 20%. We perform a Difference-inDifference analysis by comparing the expansion of microcredit loans (treatment group) with that of corporate loans (control group). Additionally, we narrow in on similar levels of both loan size and debtor's risk in order to make microcredit and corporate portfolios more comparable. Our results indicate that this policy encouraged and facilitated financial access to entrepreneurs. Specifically, we find that, on average, depending on the specification model, the amount lent by credit establishments increased between 28.2% and 49.9%, and the number of new loans increased between 27.6% and 52.6%.

Effect of Interest Rate Capping on Market Performance in Listed Commercial Banks in Mombasa County, Kenya

“…Usury laws are rules governing interest rates that can be charged on a loan by a financial institution and target the practice of charging excessively high rates on credit facilities by introducing caps on maximum interest rate amounts which is designed to protect consumers (Benmelech & Maskowitz, 2016). Miller (2013) concluded that although there were glaring market failures in credit markets, Governments through their Central banks do not have a role in managing these market failures. Interest rates capping is not the best solution in meeting the lower interest rates.…”