Top

Empirical Economics

Published in:

13-06-2023

Impact of the interest rate ceiling on credit cost, loan size, and informal credit in the microfinance sector: evidence from a household survey in Cambodia

Authors: Sovannroeun Samreth, Daiju Aiba, Sothearoath Oeur, Vanndy Vat

Published in: Empirical Economics | Issue 6/2023

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

This study examines the effects of the imposition of an interest rate ceiling in April 2017 on credit cost, loan size, and informal credit in Cambodia’s rapidly growing microfinance sector, based on a household survey conducted in August and September 2019. From our analyses, we confirm past evidence that indicates that the average interest rate was reduced, but the average loan assessment and processing fee increased after the ceiling imposition. However, our results confirm the decline in the average effective interest rate (interest rate plus loan assessment and processing fee) after the ceiling imposition. The results also show an increase in the average size of loans from formal sources at a relatively small loan level, and an increase in the percentage of loans from informal sources. Monitoring of informal credit activities is important to mitigate the adverse consequences of the ceiling imposition.

previous article Hedging against inflation: housing versus equity

next article Estimating the impact of the financial cycle on fiscal policy

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Available only for authorised users

In our discussion hereafter, MFIs refer to deposit-taking microfinance institutions, non-deposit taking microfinance institutions, and rural credit institutions.

MFIs data published by the National Bank of Cambodia (NBC). https://www.nbc.org.kh/english/economic_research/mfis_reports.php. Accessed 17 July 2020.

The double-bottom-line issue can lead to the so-called ‘mission drift’ in microfinance. That is, MFIs may move away from poor to better-off borrowers.

Bateman et al. (2019) provided a good documentation of critical assessments of socio-economic consequences of microfinance activities in various countries such as Bangladesh, Brazil, Cambodia, Colombia, India, Mexico, Morocco, Peru, and South Africa.

The impact of ceiling imposition may also include an increase in the need for monetary authorities to deploy their resources to supervise MFIs and enforce compliance with the ceiling, as argued by Ferrari et al. (2018). However, the examination of such effects is beyond the scope of our study and data availability does not allow us to do so.

This is true, at least, for the case of Cambodia. However, in some countries such as Thailand, not only the interest rate, but also the loan fees are subject to a legal ceiling rate as documented by Zetzsche and Dewi (2018). Our discussion does not hold for such a case.

The dataset used in this study is available upon request.

The criteria of a household having access to an MFI loan before or after the imposition of the interest rate ceiling is based on the contract date of the loan. For instance, if a household has a loan contract before the ceiling imposition on April 1, 2017, this household is considered to have had loan access before the ceiling, even if that loan maturity may last until the period after the ceiling. A loan whose contract date is April 1, 2017, or after, is considered as a loan after the ceiling. This is consistent with the loan criteria mentioned in the ceiling policy by the NBC.

More details on the ID Poor program in Cambodia are available at https://www.idpoor.gov.kh. Accessed 15 January 2021.

The variance inflation factors (VIFs) of explanatory variables in our estimation equations are also calculated to examine the multicollinearity issue. The results, available upon request, showed that, except for the average age of household members and its squared term, the VIFs of explanatory variables are smaller than ten, indicating that there is no significant problem of multicollinearity. When the average age of household members and its squared term are incorporated in the estimation equation, it is common that their VIFs are very large. However, it should not be problematic for this case, since the two variables are not a linear transformation of each other. Furthermore, since the standard errors in our quantile regression are obtained by the bootstrap method, the estimation results are heteroskedasticity-robust ones.

From our survey, about three-fourths of those who are aware of the existence of the interest rate ceiling answered that they knew about it from MFIs’ credit officers.

By using MFI data and information for the analysis, the World Bank (2019) found that the imposition of an interest rate ceiling resulted in a decline in the average credit cost, but it was partly offset by an increase in loan fees.

Aiba D, Samreth S, Oeur S, Vat V (2021) Impact of interest rate cap policies on the lending behavior of microfinance institutions in Cambodia: evidence from millions of observations in the credit registry. JICA Ogata Research Institute Working Paper No. 224. Tokyo. https://www.jica.go.jp/jica-ri/publication/workingpaper/l75nbg00001a4dj0-att/JICA_Ogata_Research_Institute_WP_No224.pdf. Accessed 15 June 2022

Alper E, Clements B, Hobdari N, Moya PR (2019) Do interest rate controls work? Evidence from Kenya. Rev Dev Econ. https://doi.org/10.1111/rode.12675CrossRef

Bateman M (2019) Cambodia: the next domino to fall? In: Bateman M et al (eds) The rise and fall of global microcredit: development, debt and disillusion. Routledge, New York, pp 166–193

Bateman M, Blankenburg S, Kozul-Wright R (2019) The rise and fall of global microcredit: development, debt and disillusion. Routledge, New York

Bateman M, Chang H-J (2012) Microfinance and the illusion of development: from hubris to nemesis in thirty years. World Econ Rev 1:13–36

Benmelech E, Moskowitz TJ (2010) The political economy of financial regulation: evidence from U.S. state usury laws in the 19th century. J Fin 65:1029–1073. https://doi.org/10.1111/j.1540-6261.2010.01560.xCrossRef

Besley T (1994) How do market failures justify interventions in rural credit markets? World Bank Res Obs 9:27–47. https://doi.org/10.1093/wbro/9.1.27CrossRef

Blitz RC, Long MF (1965) The economics of usury regulation. J Pol Econ 73:608–619. https://doi.org/10.1086/259087CrossRef

Brickell K, Picchioni F, Natarajan N, Guermond V, Parsons L, Zanello G, Bateman M (2020) Compounding crises of social reproduction: microfinance, over-indebtedness and the COVID-19 pandemic. World Dev 136:105087. https://doi.org/10.1016/j.worlddev.2020.105087CrossRef

Bylander M, Res P, Jacoby L, Bradley P, Pérez AB (2019) Over-indebtedness and microcredit in Cambodia: moving beyond borrower-centric frames. Dev Policy Rev 37(S2):140–160. https://doi.org/10.1111/dpr.12399CrossRef

Caballero-Montes T, Godfroid C, Labie M (2021) Are interest rate caps a relevant tool to cool down overheating microfinance markets? Strateg Change 30:319–330. https://doi.org/10.1002/jsc.2426CrossRef

Chhorn D (2021) Microfinance illusion, poverty and welfare in Cambodia. J Asia Pac Econ 26:694–719. https://doi.org/10.1080/13547860.2020.1826074CrossRef

Crawford A, Hamilton I (2018) Impact of the interest rate cap on microfinance in Cambodia. Monash University, Melbourne, and Cambodia Microfinance Association, Phnom Penh

Ellison A, Forster R (2008) The impact of interest rate ceilings: the evidence from international experience and the implications for regulation and consumer protection in the credit market in Australia. Policis, Government of Australia, Canberra

Ferrari A, Masetti O, Ren J (2018) Interest rate caps: the theory and the practice. World Bank Policy Research Working Paper No. 8398. World Bank Group, Washington DC. https://openknowledge.worldbank.org/bitstream/handle/10986/29668/WPS8398.pdf?sequence=1&isAllowed=y. Accessed 30 May 2019

Gonzalez-Vega C (1984) Credit-rationing behavior of agricultural lenders: the iron law of interest-rate restrictions. In: Adams D et al (eds) Undermining rural development with cheap credit. Westview Press, New York, pp 78–95

Green WN, Bylander M (2021) The exclusionary power of microfinance: over-indebtedness and land dispossession in Cambodia. Sociol Dev 7:202–229. https://doi.org/10.1525/sod.2021.7.2.202CrossRef

Helms B, Reille X (2004) Interest rate ceilings and microfinance: the story so far. CGAP Occasional Paper No. 9. https://www.cgap.org/sites/default/files/CGAP-Occasional-Paper-Interest-Rate-Ceilings-and-Microfinance-The-Story-So-Far-Sep-2004.pdf. Accessed 10 April 2019

Heng D, Chea S, Heng B (2021) Impact of interest rate cap on financial inclusion in Cambodia. IMF Working Paper WP/21/107. International Monetary Fund, Washington DC. https://www.imf.org/en/Publications/WP/Issues/2021/04/29/Impacts-of-Interest-Rate-Cap-on-Financial-Inclusion-in-Cambodia-50349. Accessed 30 May 2022

Heng D (2015) Impact of the new financial services law in Bolivia on financial stability and inclusion. IMF Working Paper WP/15/267. International Monetary Fund, Washington DC. https://www.imf.org/external/pubs/ft/wp/2015/wp15267.pdf. Accessed 15 May 2020

Koenker R, Bassett G (1978) Regression quantiles. Econometrica 46:33–50. https://doi.org/10.2307/1913643CrossRef

Liv D (2013) Study on the drivers of over-indebtedness of microfinance borrowers in Cambodia: an in-depth investigation of saturated areas. Cambodia Institute of Development Final Report. Phnom Penh. https://www.blueorchard.com/wp-content/uploads/2015/06/OID-Final-Report.pdf. Accessed 30 March 2019

Madeira C (2019a) The impact of interest rate ceilings on households’ credit access: evidence from a 2013 Chilean legislation. J Banking Fin 106:166–179. https://doi.org/10.1016/j.jbankfin.2019.06.011CrossRef

Madeira C (2019b) Computing population weights for the EFH survey. Econ Chilena 22:4–26

Miller H (2013) Interest rate caps and their impact on financial inclusion. Economic and Private Sector, Professional Evidence and Applied Knowledge Services. https://assets.publishing.service.gov.uk/media/57a08a0de5274a31e00003d0/Interest_rate_caps_and_their_impact_on_financial_inclusion.pdf. Accessed 20 March 2019

NBC (2017) Prakas on interest rate ceiling on loan. National Bank of Cambodia, Phnom Penh. https://www.nbc.org.kh/download_files/legislation/prakas_eng/Prakas-on-Interest-Rate-Cap-Eng.pdf. Accessed 17 July 2020

NBC (2020) Financial stability review 2019. National Bank of Cambodia, Phnom Penh. https://www.nbc.org.kh/download_files/publication/fsr_eng/FSR%202019-%20ENG.pdf. Accessed 10 July 2020

NIS (2015) Cambodia socio-economic survey 2014. National Institute of Statistics, Ministry of Planning, Phnom Penh. https://nis.gov.kh/nis/CSES/Final%20Report%20CSES%202014.pdf. Accessed 15 March 2020

Peterson RL (1983) Usury laws and consumer credit: a note. J Fin 38:1299–1304. https://doi.org/10.1111/j.1540-6261.1983.tb02299.xCrossRef

Phim R (2014) The impacts of microcredit on poverty reduction: evidence from Cambodian rural villages. Philipp Rev Econ 51:121–150

Rigbi O (2013) The effects of usury laws: evidence from the online loan market. Rev Econ Stat 95:1238–1248. https://doi.org/10.1162/REST_a_00310CrossRef

Roa MJ, Villegas A, Garrón I (2022) Interest rate caps on microcredit: evidence from a natural experiment in Bolivia. J Dev Eff 14:125–142. https://doi.org/10.1080/19439342.2021.1968934CrossRef

Rosenberg R, Gonzalez A, Narain S (2009) The new moneylenders: are the poor being exploited by high microcredit interest rates? CGAP Occasional Paper No. 15. https://www.cgap.org/sites/default/files/CGAP-Occasional-Paper-The-New-Moneylenders-Are-the-Poor-Being-Exploited-by-High-Microcredit-Interest-Rates-Feb-2009.pdf. Accessed 30 January 2020

Roth V, Araar A, Sry B, Phann D (2017) The dynamics of microcredit borrowings in Cambodia. Partnership for Economic Policy Working Paper 2017-17. https://cdri.org.kh/storage/pdf/2017-17_1623298788.pdf. Accessed 20 June 2020

Schicks J (2010). Microfinance over-indebtedness: understanding its drivers and challenging the common myths. CEB Working Paper No. 10/048. Solvay Brussels School of Economics and Management, Brussels. Université Libre de Bruxelles. https://www.findevgateway.org/sites/default/files/publications/files/mfg-en-paper-microfinance-over-indebtedness-understanding-its-drivers-and-challenging-the-common-myths-2010.pdf. Accessed 20 December 2019

Seng K (2018a) Revisiting microcredit’s poverty-reducing promise: evidence from Cambodia. J Int Dev 30:615–642. https://doi.org/10.1002/jid.3336CrossRef

Seng K (2018b) Rethinking the effects of microcredit on household welfare in Cambodia. J Dev Stud 54:1496–1512. https://doi.org/10.1080/00220388.2017.1299139CrossRef

Sinha S (2016) Impact of restrictions on interest rates in microfinance. Asian Development Bank Working Paper Series. No45. https://www.adb.org/sites/default/files/publication/200141/sdwp-045.pdf. Accessed 30 May 2020

Stiglitz J, Weiss A (1981) Credit rationing in markets with imperfect information. Am Econ Rev 71:393–410

Villegas DJ (1982) An analysis of the impact of interest rate ceilings. J Fin 37:941–954. https://doi.org/10.1111/j.1540-6261.1982.tb03590.xCrossRef

Villegas DJ (1989) The impact of usury ceilings on consumer credit. South Econ J 56:126–141. https://doi.org/10.2307/1059061CrossRef

Watkins T (2018) Introduction to microfinance. World Scientific Press, New YorkCrossRef

World Bank (2019) Microfinance and household welfare: Cambodia policy note. World Bank, Washington DC. https://openknowledge.worldbank.org/bitstream/handle/10986/31418/128266-REVISED-WP-PUBLIC-Nota-MFI-web.pdf?sequence=5&isAllowed=y. Accessed 27 March 2019

Zetzsche D, Dewi TR (2018) The paradoxical case against interest rate caps for microfinance—and: how FinTech and RegTech resolve the dilemma. Faculty of law, economics and finance, University of Luxembourg, Law Working Paper Series 2018–003. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3159202. Accessed 10 June 2022

Title: Impact of the interest rate ceiling on credit cost, loan size, and informal credit in the microfinance sector: evidence from a household survey in Cambodia
Authors: Sovannroeun Samreth
Daiju Aiba
Sothearoath Oeur
Vanndy Vat
Publication date: 13-06-2023
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 6/2023
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-023-02443-5

Springer Professional

Abstract

Please log in to get access to your license.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft"

Springer Professional "Wirtschaft+Technik"

Other articles of this Issue 6/2023

Language proficiency of migrants: the relation with job satisfaction and skill matching

Estimating the impact of the financial cycle on fiscal policy

Kernel-based time-varying IV estimation: handle with care

Is unemployment hysteretic or structural? A Bayesian model selection approach

The dynamics of labor force participation: Is all quiet on the Appalachian front?

Housing demand shocks and households’ balance sheets

Premium Partner