Impact of the Interest Rate Ceiling on Credit Cost, Loan Size, and Informal Credit in the Microfinance Sector: Evidence From a Household Survey in Cambodia

This study examines the effects of the imposition of an interest rate ceiling in April 2017 on credit cost, loan size, and informal credit in Cambodia’s rapidly growing microfinance sector, based on a household survey conducted in August and September 2019. From our analyses, we confirm past evidence that indicates that the average interest rate was reduced, but the average loan assessment and processing fee increased after the ceiling imposition. However, our results confirm the decline in the average effective interest rate (interest rate plus loan assessment and processing fee) after the ceiling imposition. The results also show an increase in the average size of loans from formal sources at a relatively small loan level, and an increase in the percentage of loans from informal sources. Monitoring of informal credit activities is important to mitigate the adverse consequences of the ceiling imposition.