The Impact of Interest Rate Ceilings on Microfinance

This donor brief notes that interest ceilings are found in many countries throughout the world. With the expansion of microfinance in developing countries, many legislators and the general public have found it difficult to accept that small loans to poor people generally cost more than normal commercial bank rates. The brief argues that though meant to protect consumers, interest rate ceilings almost always hurt the poor.

The first question considered is whether is whether interest rate ceilings are an effective way to protect the poor? The discussion includes anecdotal evidence from Nicaragua, West Africa and South Africa. Given the conclusion mentioned above, the brief then moves on to look at alternative ways to protect consumers, where it discusses consumer protection laws or schemes, public disclosure of loan costs, and efficiency, scale and competition.

Finally, the discusses the actions donors can take in relation to interest rate ceilings – set a good example, inform and educate policy makers, support transparency and standard reporting, including an emphasis on efficiency and to foster growth and competition.

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