Impacts of Interest Rate Cap on Financial Inclusion in Cambodia

Author/Editor:

Dyna Heng ; Serey Chea ; Bomakara Heng

Publication Date:

April 29, 2021

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

Interest rate caps, despite their intended objective of broadening financial inclusion, can have undesirable effects on financial inclusion under certain conditions. This paper examines the effect of microfinance-loan interest rate caps on financial inclusion in Cambodia. Based on a difference-in-difference analysis on bank and microfinance supervisory data, results show some unintended impact on financial inclusion. The cap led to a significant increase in non-interest fees charged on new loans following the introduction of an annual cap. Microfinance borrowers declined immediately, amid an increase in credit growth, as microfinance institutions targeted larger borrowers at the expense of smaller ones. Microfinance institutions, responded differently to the cap, considering their own operation and funding costs, and client base. Two years after the cap, institutions resumed lending to a wider group of borrowers with lower funding and operation costs brought by mobile payment development.

Series:

Working Paper No. 2021/107

Subject:

Frequency:

regular

English

Publication Date:

April 29, 2021

ISBN/ISSN:

9781513582634/1018-5941

Stock No:

WPIEA2021107

Pages:

35

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