Impact of Restrictions on Interest Rates in Microfinance

Publication | September 2016

The issue that interest rate restrictions attempt to address is one of social welfare: how to enable low-income families to obtain access to finance at a price that is acceptable to society.

The paper examines the impact of restrictions on interest rates in microfinance. If imposing of restrictions on interest rates in microfinance is not the best means of enhancing social welfare for enabling low-income families to obtain finance at a reasonable price, then what is? The simplistic economist’s answer to this involves economies of scale, which can work in one of three ways. First, by increasing loan size it should be possible to bring down the average price of loans. Second, economic theory suggests that by expanding the amount of activity it should be possible to bring average costs down. And finally, promoting competition is another way of reducing costs and/or squeezing the margin earned by microfinance institutions.

Contents 

  • Introduction – The Lure of Restricting Interest Rates in Microfinance
  • Interest Rate Restrictions – Where, What, and How
  • The Impact – Repression as Freedom
  • Conclusion – Reclaiming the Welfare Objective
  • References

Additional Details

Type
Series
Subjects
  • Finance sector development
  • Financial inclusion and microfinance
  • Small and medium enterprise (SME) financing
Pages
  • 30
Dimensions
  • 8.5 x 11
SKU
  • WPS168440-2

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