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Integrating market conditions into regulatory decisions on microfinance interest rates: does competition matter?

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  • Tristan Caballero-Montes

    (Université de Mons (Center for European Research in Microfinance, CERMi))

Abstract

Microfinance rapidly developed and commercialized, exacerbating competition and the attention paid to profits. In response, many governments have capped microcredit interest rates. Using unique data on interest rate caps and a dataset comprising 1115 microfinance institutions over 2015–2018, we investigate the effect of such regulatory measures on loan sizes, with fixed-effect and two-stage residual inclusion regressions. Going further with a moderation analysis and multiple measurements of competition, we investigate whether market conditions affect this relationship. We find that microfinance institutions facing interest rate caps are associated with larger loans and financial exclusion, and that competition emphasizes this adverse effect. We suggest two mechanisms explaining such results: the deterioration of cross-subsidization possibilities and the exacerbation of risk-taking strategies of microfinance institutions, both favored by competition. Therefore, we argue against interest rate restrictions, and for the adoption of a more systemic analysis of regulatory outcomes integrating market conditions.

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  • 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.
    • Handle: RePEc:kap:annfin:v:19:y:2023:i:2:d:10.1007_s10436-022-00417-8
    DOI: 10.1007/s10436-022-00417-8
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    More about this item

    Keywords

    Microfinance; Interest rate cap; Regulation; Competition; Social outreach; Moderation;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

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