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2017-12-08 - Colloque/Présentation - communication orale - Anglais - 12 page(s)

Caballero-Montes Tristan, Godfroid Cécile , Labie Marc , "The Ins and Outs of Implementing Interest Rate Caps in Microfinance Industry" in L’émergence en question : Marqueurs et dynamiques du développement - Financial Inclusion: Item 8 , Dijon, France, 2017

  • Codes CREF : Economie des PVD (DI4375), Management (DI4360)
  • Unités de recherche UMONS : Economie et gestion de l'entreprise (W742)
  • Instituts UMONS : Institut de Recherche en Développement Humain et des Organisations (HumanOrg)
  • Centres UMONS : Microfinance (CERMI)

Abstract(s) :

(Anglais) After having been praised for many years as a quasi-magic bullet in the fight against poverty, microfinance is nowadays much more criticized. To a certain extent, it is perfectly understandable as expectations had clearly been set too high by many actors, and therefore it is somehow logical that a backdraft is taking place. This being acknowledged, it is important to make sure that what has been learnt over time is not being lost in the process. The key concept at the core of microfinance is the potential of establishing « double bottom line institutions » that are simultaneously financially sustainable and socially useful. It is of course a challenge and the ways to contribute to that objective remain at the core of the debates around the role of microfinance. One of the central issues to this debate is the cost being charged to customers in order to give them access to financial products. This has been a topic for debates since the industry started. A lot has been written and discussed about what fair interest rates are and how interest rates are computed. Indeed, the issue is key. On one hand, if interest rates are too low, Microfinance Institutions (MFIs) may end up in bankruptcy as unsustainable organizations. Indeed, as MFIs tend to distribute a large number of small loans, they have to charge an interest rate that is relatively high and often higher than the one applied in the banking sector in order to be able to cover the fixed administrative costs associated with these small loans. On the other hands, if interest rates are too high, there is a high probability that the services provided, even when taken by the customers (out of alternative options), may have little or no impact (and sometimes even adverse impact) on their well-being. In all cases, interest rates applied by microfinance institutions should remain lower than the ones applied by informal lenders that often tend to be abusive. Facing this dilemma, and pushed by the critics opposing microfinance as such, some governments are now paying much more attention to the possibility to cap interest rates applied in financial inclusion schemes. Imposing a cap aims to prevent financial institutions to provide loans containing higher interest rates than the cap considered. Different arguments have been made in favor and against such policies. According to some scholars, implementing caps help to reduce the paradox of offering high interest rates to poor people and to avoid important inefficiencies. Nevertheless, the literature also shows that governmental institutions implementing caps generally do not take the cost structure of MFIs, these caps often being too low for these latter. In this case, interest rates caps may reduce the access to financial services. Indeed, the loss on the smallest loans induced by interest rate caps may result in the withdrawal of microfinance institutions from markets where smallest loans are the most important but also the costliest for a MFI, such as rural areas. This may lead to a market contraction and to the financial exclusion of the poorest. Interest rates may also reduce cost transparency, MFIs being tempted to cover their costs by imposing new or additional fees that clients would not be able to understand clearly. In this vein, we can ask us to which extent implementing interest rate caps is a good idea. And if it can be beneficial, how should it be done? This is what our paper intends to discuss. This paper will particularly focus on the Cambodian case, as the National Bank of Cambodia decided to set a yearly 18% interest rates cap on microcredits for all loans offered or refunded from 1st April 2017, this cap representing half of the rates offered by some MFIs in this country. Thanks to a review of all arguments in favor and against the implementation of interest rate caps and the analysis of the Cambodian case, this paper enables us to suggest a framework that could be applied to any country that would consider implementing such caps.