Impacts of Interest Rate Cap on Financial Inclusion in Cambodia
IMF Working Papers, April 29, 2021
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- Impacts of Interest Rate Cap on Financial Inclusion in Cambodia
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Bibliographic details
- Authors: Dyna Heng, Serey Chea, Bomakara Heng
- Published: April 29, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513582634.001
Summary findings
- Interest rate caps, despite their intended objective of broadening financial inclusion, can have undesirable effects on financial inclusion under certain conditions.
- The paper examines the effect of microfinance-loan interest rate caps on financial inclusion in Cambodia using supervisory data.
- Results show some unintended impacts on financial inclusion following the introduction of an annual cap.
Empirical approach
- Analysis based on a difference-in-difference methodology applied to bank and microfinance supervisory data.
Key empirical results
- 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 after the cap was introduced, amid an increase in credit growth.
- Microfinance institutions targeted larger borrowers at the expense of smaller ones following the cap.
- Microfinance institutions responded differently to the cap depending on their own operation and funding costs, and client base.
- Two years after the cap, institutions resumed lending to a wider group of borrowers as lower funding and operation costs brought by mobile payment development reduced constraints.
Policy-relevant implications
- Interest rate caps can trigger offsetting adjustments by lenders (for example, increasing non-interest fees) that undermine the caps' financial inclusion goals.
- Differential responses across institutions imply that a one-size-fits-all cap can have heterogeneous and potentially regressive effects on borrower segments, particularly smaller microfinance borrowers.
- Technological developments (mobile payment development) that lower funding and operation costs can help restore broader lending after initial contractionary effects from caps.
Source: Dyna Heng, Serey Chea, and Bomakara Heng, "Impacts of Interest Rate Cap on Financial Inclusion in Cambodia", IMF Working Papers, April 29, 2021.
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