The Paradoxical Case Against Interest Rate Caps for Microfinance

In more than 30 countries worldwide, microfinance-related rules and regulations imposed hard interest rate cap, i.e. caps prohibiting interests over a certain, precisely determined level. As it is argued in a new research paper authored by Prof. Dr. Dirk Zetzsche, ADA Chair in Financial Law (inclusive finance) at the University of Luxembourg, and Tsany Ratna Dewi, PhD student at the ADA Chair, as one-size-fits-all solution the disadvantages often outweigh the benefit. In particular, the authors argue that such hard interest rate caps increase the importance of the informal credit sector and further the microfinance institution's mission drift towards fully commercial institutions. The authors develop alternative solutions to keep interest rates at a reasonable level through FinTech and RegTech means. in particular, the authors demand investments to further well-functioning credit registers, disclosure of effective interest rates and the facilitation of digital financial services.

The paper is available for download at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3159202