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Interest rate caps around the world: still popular, but a blunt instrument

Author

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  • Maimbo, Samuel Munzele
  • Henriquez Gallegos, Claudia Alejandra
Abstract
Among other common forms of government financial control, caps on interest rates have been declining over the past several decades as most industrialized countries and a rising number of developing countries continue liberalizing their financial policies. However, in several countries the last financial crisis reopened the debate on interest rate controls as a tool for consumer protection. This paper undertakes a stock-taking exercise to determine the number of countries currently capping interest rates on loans. The paper looks at the main characteristics of the regimes countries have used, including the source of rate-setting authority, the methodology, and the criteria for establishing the cap. The paper finds at least 76 countries around the world currently use some form of interest rate caps on loans -- all with varying degrees of effects, including the withdrawal of financial institutions from the poor or from specific segments of the market, an increase in the total cost of the loan through additional fees and commissions, among others. The paper concludes that there are more effective ways of reducing interest rates on loans over the long run and of improving access to finance: measures that enhance competition and product innovation, improve financial consumer protection frameworks, increase financial literacy, promote credit bureaus, enforce disclosure of interest rates, and promote microcredit products. Such measures should be implemented in an integrated manner. However, if caps are still considered a useful policy tool for reducing interest rates on loans and increasing access to finance, they should be implemented in accord with the caveats described in the paper.

Suggested Citation

  • Maimbo, Samuel Munzele & Henriquez Gallegos, Claudia Alejandra, 2014. "Interest rate caps around the world: still popular, but a blunt instrument," Policy Research Working Paper Series 7070, The World Bank.
    • Handle: RePEc:wbk:wbrwps:7070
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    References listed on IDEAS

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    Cited by:

    1. Seth Garz & Xavier Gine & Dean Karlan & Rafe Mazer & Caitlin Sanford & Jonathan Zinman, 2021. "Consumer Protection for Financial Inclusion in Low- and Middle-Income Countries: Bridging Regulator and Academic Perspectives," Annual Review of Financial Economics, Annual Reviews, vol. 13(1), pages 219-246, November.
    2. Tristan Caballero-Montes, 2023. "Integrating market conditions into regulatory decisions on microfinance interest rates: does competition matter?," Annals of Finance, Springer, vol. 19(2), pages 201-232, June.
    3. Walter Cuba & Eduardo Diaz, 2023. "Effect of caps on interest rates in Peru," IHEID Working Papers 02-2023, Economics Section, The Graduate Institute of International Studies.
    4. Madeira, Carlos, 2019. "The impact of interest rate ceilings on households’ credit access: Evidence from a 2013 Chilean legislation," Journal of Banking & Finance, Elsevier, vol. 106(C), pages 166-179.
    5. Guenette,Justin Damien, 2020. "Price Controls : Good Intentions, Bad Outcomes," Policy Research Working Paper Series 9212, The World Bank.
    6. Juan Sebastian Cubillos-Rocha & Juliana Gamboa-Arbelaez & Luis Fernando Melo-Velandia & Sara Restrepo-Tamayo & Maria Jose Roa-Garcia & Mauricio Villamizar-Villegas, 2021. "Effects of interest rate caps on credit access," Journal of Regulatory Economics, Springer, vol. 60(2), pages 117-139, December.
    7. World Bank, 2020. "Brazil Rural Finance Policy Note," World Bank Publications - Reports 34195, The World Bank Group.
    8. Calice,Pietro & Diaz Kalan,Federico Alfonso & Masetti,Oliver, 2020. "Interest Rate Repression : A New Database," Policy Research Working Paper Series 9457, The World Bank.
    9. Emre Alper & Benedict Clements & Niko Hobdari & Rafel Moya Porcel, 2020. "Do interest rate controls work? Evidence from Kenya," Review of Development Economics, Wiley Blackwell, vol. 24(3), pages 910-926, August.
    10. Ochenge, Rogers & Tiriongo, Samuel, 2018. "Gaps from the cap: Implications for financial inclusion in Kenya," KBA Centre for Research on Financial Markets and Policy Working Paper Series 23, Kenya Bankers Association (KBA).
    11. Ryszard Kowalski & Grzegorz Wałęga, 2022. "Regulation of Usury: Justification, Consequences, and Some Lessons from Polish Experience," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 2, pages 57-73.
    12. María José Roa & Alejandra Villegas & Ignacio Garrón, 2020. "Effects of interest rate caps on microcredit: evidence from a natural experiment in Bolivia," Development Research Working Paper Series 03/2020, Institute for Advanced Development Studies.

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    More about this item

    Keywords

    Access to Finance; Financial Literacy; Debt Markets; Banks&Banking Reform; Investment and Investment Climate;
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