Interest rate ceiling & microfinance institutions performance in South Africa: Does capital structure matter?

Microfinance institutions (MFIs) aim to provide financial access to the unbanked, but often at high costs. To curb excessive interest charges, South Africa introduced interest rate ceilings in 2007 to protect poor borrowers from usury practices. However, since most MFIs depend heavily on interest income with limited diversification, such regulation may threaten their sustainability. This paper examines how interest rate caps affect the financial and social performance of MFIs, considering their capital structure, using World Bank’s microfinance information exchange data (1999–2019). The findings reveal that capital structure plays a significant role: MFIs reliant on debt are more sensitive to interest rate caps, while equity-financed institutions are less affected. Although financial and social performance weakened overall, results underscore that rigid interest ceilings, while designed to protect borrowers, may undermine lender viability. Hence, more balanced and less disruptive policy measures are essential to address predatory lending sustainably.