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.
Details
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Author
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Document Date
2014/10/01
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Document Type
Policy Research Working Paper
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Report Number
WPS7070
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Volume No
1
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Total Volume(s)
1
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Country
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Region
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Disclosure Date
2014/10/01
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Disclosure Status
Disclosed
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Doc Name
Interest rate caps around the world: still popular, but a blunt instrument
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Keywords
interest rate cap;finance and markets;interest rates on loan;interest rate ceiling;caps on interest rates;financial sector regulator;financial sector indicator;Mekong Facility Line;small and medium enterprise;Savings and Credit Institutions;interest rate control;average interest rate;Effective interest rate;Nonbanking Financial Institutions;microfinance institution;interest rate restriction;access to finance;cost of credit;nominal interest rate;consumer credit law;financial consumer protection;annual interest rate;excessive interest rate;lower interest rate;commercial bank lending;interest rate regime;annual percentage rate;interest rate subsidy;credit life insurance;supply of credit;real interest rate;gross domestic product;efficiency of investment;types of consumer;consumer protection regulation;consumer interest rate;diversity of products;bank interest rate;higher interest rate;banking sector reform;allocation of investment;high market power;central banking law;list of countries;minister of finance;relative interest rate;cost of liquidity;probability of default;european central bank;amount of credit;financial sector policy;financial sector development;maximum interest;benchmark rate;
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Citation
Henriquez Gallegos,Claudia Alejandra Maimbo,Samuel Munzele
Interest rate caps around the world: still popular, but a blunt instrument (English). Policy Research working paper ; no. WPS 7070 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/876751468149083943/Interest-rate-caps-around-the-world-still-popular-but-a-blunt-instrument