Abstract
The microfinance industry has rapidly developed and commercialized since its early days, exacerbating competition and emphasizing the attention paid to profits. As a response, many governments have been tempted to cap lending interest rates, a measure generally considered as socially counterproductive. With a consolidated dataset including 986 microfinance institutions from 73 countries over 2015-2018, we assess the effect of interest rate caps on the average loan size provided by microfinance institutions with fixed-effect regressions. Going one step further, we use a moderation analysis with multiple indicators, including the Herfindahl-Hirschman and Lerner indexes, to understand how competition affects this initial relationship. Our findings confirm that institutions facing interest rate caps provide larger loans on average, a sign of exacerbated financial exclusion, and suggest that competition amplifies this phenomenon. This paper bring two main contributions. First, it provides regulators with a better understanding of the impact and perverse effects of interest rate restrictions in a sensitive focused on the financial inclusion of the poor. In addition, they open the door to a new, more systemic approach of analyzing regulatory decisions and their impact, by integrating market conditions to the equation.
Presenters
Tristan Caballero MontesPhD Student - Researcher, Centre for European Research in Microfinance (CERMi), University of Mons (UMONS), Belgium
Details
Presentation Type
Paper Presentation in a Themed Session
Theme
Economic, Social, and Cultural Context
KEYWORDS
Financial inclusion; Microfinance; Regulation; Social outreach; Competition; Developing countries
