Integrating Market Conditions into Regulatory Decisions on Microfinance Interest Rates: Does Competition Matter?

Microfinance rapidly developed and commercialized, exacerbating competition and the attention paid to profits. In response, many governments have been tempted to cap microcredit interest rates. With consolidated data on 1,115 microfinance institutions over 2015-2018, we investigate the effect of interest rate caps on the size of the loans offered by microfinance institutions, through fixed-effect regressions. Going further with a moderation analysis and the Herfindahl-Hirschman and Lerner indexes, we investigate whether competition affects this relationship. The findings confirm that institutions facing interest rate restrictions are associated with larger loans, which suggests that such constraints tend to deteriorate financial inclusion. The findings also indicate that competition amplifies this relationship.