Research Note N°2 on Microfinance Regulation - Investigating the Interplay between Interest Rate Caps and Competition in a Financial Inclusion Context

Many regulators have been tempted to cap the lending rates of microfinance institutions, that is, to limit the rates charged to poor and financially excluded clients through microcredit. This has been even truer since the industry commercialized and drew the attention of the public opinion and authorities. Yet, is the outcome of such regulation the desired one? Besides, is this outcome sensitive to market conditions? This note addresses these key questions for regulators to better understand the impact of market conditions on the outcome of their decisions.