The Impact of Interest Rate Ceilings on Microfinance

What is the best way to safeguard the interest of poor borrowers?

This paper provides arguments against the use of interest rate ceilings as means to protect poor borrowers and suggests alternatives. The author says that interest rate ceilings can be counterproductive, since in such an environment MFIs:

  • Often withdraw from the market;
  • Grow more slowly;
  • Become less transparent about total loan costs;
  • Reduce their work in rural and other costly markets.

The author suggests the following alternatives to protect customers:

  • Consumer protection laws or schemes;
  • Public disclosure of loan costs;
  • Efficiency, scale, and competition.

The author finally makes the following recommendations for donors:

  • Setting a good example by not imposing interest rate ceilings;
  • Informing and educating policy makers;
  • Supporting transparency and standard reporting, including an emphasis on efficiency;
  • Fostering competition and growth.

About this Publication

By Duval, A.