This paper examines the effects of the imposition of an interest rate ceiling in the microfinance sector in Cambodia in 2017, based on a household survey undertaken in 2019.
Evidence indicates that the average interest rate was reduced after the imposition of the ceiling. Although this reduction is partially offset by the increase of the average loan assessment and processing fee, the average effective interest rate (i.e., credit cost) declined. The results also show the increase in the average loan size from formal sources at a relatively small level and the increase in the percentage of loans from informal sources by a few percentage points. Moreover, we find that relatively low-income households face a higher probability of being rejected for loans and a higher debt service ratio is positively associated with a larger loan amount.
This implies the possibility of the increase of the debt burden occurring among relatively small borrowers, given that an increase of the average loan size at relatively small loan levels is observed. The evidence supporting the important role of financial literacy in reducing household debt burden is also confirmed.
Keywords: Interest rate ceiling, Financial inclusion, Microfinance, Cambodia.