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

Caballero-montes, Tristan

2023 • In Annals of Finance, 19 (2), p. 201 - 232

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https://hdl.handle.net/20.500.12907/47069

DOI
10.1007/s10436-022-00417-8

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Keywords :

Competition; Interest rate cap; Microfinance; Moderation; Regulation; Social outreach; Finance; Economics, Econometrics and Finance (all); General Economics, Econometrics and Finance

Abstract :

[en] 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.

Research center :

CERMI - Microfinance

Disciplines :

Finance

Author, co-author :

Caballero-montes, Tristan ; Université de Mons - UMONS > Faculté Warocqué d'Economie et de Gestion > Service de Management et étude des organisations

Language :

English

Title :

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

Publication date :

June 2023

Journal title :

Annals of Finance

ISSN :

1614-2446

eISSN :

1614-2454

Publisher :

Springer Science and Business Media Deutschland GmbH

Volume :

19

Issue :

2

Pages :

201 - 232

Peer reviewed :

Peer Reviewed verified by ORBi

Development Goals :

1. No poverty

Additional URL :

https://link.springer.com/content/pdf/10.1007/s10436-022-00417-8.pdf

Research unit :

W742 - Management et étude des organisations

Research institute :

Soci&Ter

Funders :

Fonds De La Recherche Scientifique - FNRS

Funding text :

Funding was provided by Fonds De La Recherche Scientifique - FNRS (Grant No. FRESH PhD Grant).

Data Set :

10.1007/s10436-022-00417-8

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