Interest Rate Caps around the World : Still Popular, but a Blunt Instrument

Among other common forms of government financial control, caps on interest rates have been declining over the past several decades as most industrialized countries and a rising number of developing countries continue liberalizing their financial policies. However, in several countries the last financial crisis reopened the debate on interest rate controls as a tool for consumer protection. This paper undertakes a stock-taking exercise to determine the number of countries currently capping interest rates on loans. The paper looks at the main characteristics of the regimes countries have used, including the source of rate-setting authority, the methodology, and the criteria for establishing the cap. The paper finds at least 76 countries around the world currently use some form of interest rate caps on loans -- all with varying degrees of effects, including the withdrawal of financial institutions from the poor or from specific segments of the market, an increase in the total cost of the loan through additional fees and commissions, among others. The paper concludes that there are more effective ways of reducing interest rates on loans over the long run and of improving access to finance: measures that enhance competition and product innovation, improve financial consumer protection frameworks, increase financial literacy, promote credit bureaus, enforce disclosure of interest rates, and promote microcredit products. Such measures should be implemented in an integrated manner. However, if caps are still considered a useful policy tool for reducing interest rates on loans and increasing access to finance, they should be implemented in accord with the caveats described in the paper.

Bibliographic Details

Main Authors:	Henriquez Gallegos, Claudia Alejandra, Maimbo, Samuel Munzele
Language:	English en_US
Published:	World Bank Group, Washington, DC 2014-10
Subjects:	ACCESS TO CREDIT, ACCESS TO FINANCE, ACCOUNTING, ADMINISTRATIVE FEES, ADVISORY SERVICES, ANNUAL INTEREST RATE, ANNUAL INTEREST RATES, ANNUAL PERCENTAGE RATE, APR, AVAILABILITY OF CREDIT, AVERAGE INTEREST, AVERAGE INTEREST RATE, AVERAGE INTEREST RATES, BANK ACCOUNTS, BANK ASSET, BANK COMPETITION, BANK LENDING, BANK LOANS, BANKING SYSTEM, BANKS, BOND, BOND RATES, BORROWING, BUSINESS TRANSACTIONS, COLLATERAL, COMMERCIAL BANK, COMMERCIAL BANKS, COMMERCIAL CREDIT, COMMERCIAL LENDING, COMMERCIAL LOANS, COMMERCIAL TRANSACTIONS, CONSUMER CREDIT, CONSUMER CREDITS, CONSUMER FINANCIAL LITERACY, CONSUMER LITERACY, CONSUMER LOANS, CONSUMER ORGANIZATIONS, CONSUMER PROTECTION, CONTRIBUTION, COST OF CREDIT, CREDIT BUREAU, CREDIT BUREAUS, CREDIT CARD, CREDIT CARDS, CREDIT INFORMATION, CREDIT INFORMATION SYSTEMS, CREDIT INSTITUTIONS, CREDIT MARKET, CREDIT PROVIDER, CREDIT PROVIDERS, CREDIT TRANSACTIONS, CREDIT UNION, CREDIT UNIONS, CREDITOR, CREDITORS, CREDITS, CREDITWORTHINESS, CROP INSURANCE, CURRENCY, CURRENT ACCOUNT, CURRENT INTEREST RATE, DEBT, DEVELOPING COUNTRIES, DEVELOPMENT BANK, DEVELOPMENT BANKS, EDUCATED CONSUMER, EDUCATIONAL LEVEL, EMPLOYERS, EXCESSIVE INTEREST RATES, EXPLOITATION, FAIR TRADING, FARMERS, FINANCIAL ACCESS, FINANCIAL CONSUMER, FINANCIAL COSTS, FINANCIAL CRISIS, FINANCIAL DEPTH, FINANCIAL DEVELOPMENT, FINANCIAL EDUCATION, FINANCIAL INSTITUTIONS, FINANCIAL INTERMEDIARIES, FINANCIAL INTERMEDIATION, FINANCIAL LIBERALIZATION, FINANCIAL LITERACY, FINANCIAL LITERACY INITIATIVES, FINANCIAL LITERACY PROGRAMS, FINANCIAL MANAGEMENT, FINANCIAL MARKET, FINANCIAL MARKETS, FINANCIAL MATTERS, FINANCIAL POLICIES, FINANCIAL PRODUCTS, FINANCIAL REFORMS, FINANCIAL REGULATOR, FINANCIAL REGULATORS, FINANCIAL RESOURCES, FINANCIAL SECTOR, FINANCIAL SECTOR DEVELOPMENT, FINANCIAL SECTOR INDICATORS, FINANCIAL SECTOR POLICY, FINANCIAL SECTOR REFORM, FINANCIAL SERVICES, FINANCIAL SERVICES AUTHORITY, FINANCIAL SERVICES INDUSTRY, FINANCIAL STABILITY, FINANCIAL SYSTEM, FINANCIAL SYSTEMS, FORMAL CREDIT, FORMAL FINANCIAL INSTITUTION, FORMAL FINANCIAL INSTITUTIONS, FORMAL LOANS, GOVERNMENT POLICIES, HIGH INTEREST RATE, HIGH INTEREST RATES, HOUSEHOLDS, HOUSING LOANS, INDEBTEDNESS, INFORMAL FINANCIAL INSTITUTIONS, INFORMATION ASYMMETRIES, INPUT PRICES, INSTRUMENT, INTEREST RATE, INTEREST RATE CAP, INTEREST RATE CAPS, INTEREST RATE CEILING, INTEREST RATE CEILINGS, INTEREST RATE CONTROL, INTEREST RATE CONTROLS, INTEREST RATE REGIMES, INTEREST RATE RESTRICTIONS, INTEREST RATES, INTEREST RATES ON LOANS, INTERNATIONAL BANK, INTERNATIONAL FINANCE, INVESTMENT RESOURCES, LENDER, LENDERS, LIFE INSURANCE, LOAN, LOAN APPLICATIONS, LOAN CONTRACT, LOAN SIZE, LOAN TERMS, LOCAL CURRENCY, LOW-INCOME, LOW-INCOME BORROWERS, LOW-INCOME CONSUMERS, LOW-INCOME PEOPLE, LOWER INTEREST RATE, LOWER INTEREST RATES, LOWER-INCOME HOUSEHOLDS, MARKET COMPETITION, MARKET FAILURE, MARKET FAILURES, MASS MEDIA, MEDIUM ENTERPRISES, MFI, MFIS, MICRO-ENTREPRENEURS, MICROCREDIT, MICROFINANCE, MICROFINANCE INSTITUTIONS, MICROFINANCE LOANS, MONEY LENDING, MONEY MANAGEMENT, MONEYLENDERS, MORAL HAZARD, NEW MARKETS, NOMINAL INTEREST RATE, NOMINAL INTEREST RATES, OFFICE OF FAIR TRADING, OPERATIONAL COSTS, OUTSTANDING BALANCE, OVERDRAFTS, PAYDAY LENDERS, PAYDAY LOANS, PERSONAL FINANCIAL INFORMATION, PREDATORY LENDING, PRIVATE CREDIT, PROBABILITY, PRODUCTIVITY, REGULATORY AUTHORITY, RESERVE BANK, RISK MANAGEMENT, SAVINGS, SAVINGS ACCOUNTS, SAVINGS INSTITUTIONS, SAVINGS OPTIONS, SHORT-TERM LENDING, SMALL ENTERPRISES, SMALL LOANS, SOCIAL HOUSING, SOURCES OF CREDIT, SOURCES OF FINANCE, SUPPLY OF CREDIT, TOTAL COST, TRANSACTION, TRANSACTION COSTS, TRANSPARENCY, TRANSPARENCY OF INFORMATION, TRUE COST, TYPES OF CONSUMER, UNION, UNSECURED LOANS, USURY, USURY CEILINGS, USURY LAW, USURY LAWS, WITHDRAWAL,
Online Access:	http://documents.worldbank.org/curated/en/2014/10/20303403/interest-rate-caps-around-world-still-popular-blunt-instrument https://hdl.handle.net/10986/20494
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