Interest Rate Caps: The Impact on Microfinance
2006, Rosenberg, R.

Presentation at MFC's Krakow III Policy Forum on Law and Regulation, April 6-8, 2006, Warsaw, Poland.

This document details a Consultative Group to Assist the Poor (CGAP) presentation at the 'Microfinance Corporation's (MFC's) Krakow III Policy Forum on Law and Regulation' held in Warsaw, Poland.

The presentation looks into the following questions:

• Why are microcredit interest rates high?
  
• Do interest rate caps protect low-income people?
  
• How to help low-income borrowers?

The presentation finds the following reasons why microcredit interest rates are high:

• The costs of making many small loans are higher than the costs of making a larger loan;
  
• Client characteristics add to high administration costs for microfinance institutions (MFIs);
  
• Sometimes, MFI inefficiency contributes to high interest rates.

Discussing the impact of interest rate caps, the presentation states that:

• Interest rate caps hurt low-income people who need loans by limiting their access to credit and by reducing price transparency.
  
• Credit markets with caps exhibit the following characteristics:
  
  • Less credit overall;
    
  • Lenders more risk-averse;
    
  • Much less product diversity;
    
  • Lenders abandon some low-income markets;
    
  • Pricing less transparent.
  
  
  

  The presentation argues that competition, innovation, consumer protection and transparency help low-income borrowers by:
  

  • Improving efficiency and lowering prices;
    
  • Restraining abusive lending and collection.
  
  
  

  The presentation concludes that to reduce interest rates, policy makers should:
  

  • Support transparency and consumer protection;
    
  • Foster growth and efficiency.

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