The Ins and Outs of Interest Rate Caps in the Microfinance Industry: The Case of Cambodia

Market saturation has become reality in microfinance, and with it some undesirable consequences. Among them, unhealthy market competition, harsh lending practices, risk of clients' over-indebtedness and mission drift are typical of overheating markets. Facing these challenges, some governments consider more and more interest rate caps as relevant tools to slow down microfinance markets. However, such a regulation seems to present numerous disadvantages. Is it a good idea to impose an interest rate cap in microfinance? And if so, how should it be done? We examine the implementation of an interest rate cap in 2017 on the Cambodian microfinance market, a market characterized simultaneously by an intense competition and relatively low interest rates. Through a qualitative case study, we discuss the effectiveness and the main consequences of such a regulation. Our findings show that an interest rate cap may cause adverse effects and be irrelevant to cool down an overheating market.