No.224 Impact of Interest Rate Cap Policies on the Lending Behavior of Microfinance Institutions: Evidence from Millions of Observations in the Credit Registry Database

In April 2017, the Cambodian central bank introduced an interest rate cap (IR cap) policy relating to lending by microfinance institutions (MFIs). There was no restriction on lending rates before the policy implementation and many of the MFIs was lending at a rate of more than 18%. Thus, there was some concern about the negative effects the IR cap policy may have on outreach efforts by MFIs.

This paper explores the impact of the IR cap on MFIs, by accessing granular data from the credit registry database in Cambodia. We use 6,897,168 individual loans from all regulated financial institutions, including commercial banks, specialized banks, and microfinance institutions in the period from January 2016 to March 2019. We find that both the average size per loan and the probability of requiring collateral increased after the IR cap policy was introduced for MFIs, as small-sized loans and non-collateral loans are typically costly for microfinance institutions to extend. In addition, we found that the borrowers of small-sized loans before the IR cap were likely to be excluded from the formal financial market after the IR cap. Those findings suggest that the IR cap did have an impact on the outreach of financial systems.

Keywords: Interest Rate Cap, Microfinance, Cambodia, Regulation, Bank Lending