Impacts of Interest Rate Cap on Financial Inclusion in Cambodia

Abstract

Interest rate caps, despite their intended objective of broadening financial inclusion, can have undesirable effects on financial inclusion under certain conditions. This paper examines the effect of microfinance-loan interest rate caps on financial inclusion in Cambodia. Based on a difference-in-difference analysis on bank and microfinance supervisory data, results show some unintended impact on financial inclusion. The cap led to a significant increase in non-interest fees charged on new loans following the introduction of an annual cap. Microfinance borrowers declined immediately, amid an increase in credit growth, as microfinance institutions targeted larger borrowers at the expense of smaller ones. Microfinance institutions, responded differently to the cap, considering their own operation and funding costs, and client base. Two years after the cap, institutions resumed lending to a wider group of borrowers with lower funding and operation costs brought by mobile payment development.

Effects of Interest Rate Ceiling on Sustainability of Microfinance Institutions: Lessons from Tanzania

“…Overall, the introduction of a ceiling for Tier 2 MFIs is perceived as not only against the spirit of the legal framework and discriminative, but it also goes against the principles of the free (Heng et al, 2021), such interventions lead to credit diversion, hidden non-interest charges and the poor performance of lenders. In fact, it affects the distribution of credit, as it results in a decline in the number of unsecured and small loans, leading to less focus on high-risk borrowers.…”

“…A recent study by Heng et al (2021) in Cambodia found that, despite their objective of broadening financial inclusion through interest rate ceilings, it had an undesirable effect. An interest rate ceiling of 18% was enforced on loans offered by MFIs in 2017.…”