Interest Rate Caps : The Theory and The Practice
Ceilings on lending rates remain a widely used policy tool that is intended to lower the overall cost of credit or protect consumers from exorbitant rates. Interest rate caps come in many forms and scopes and, according to their rationale, ceilings...
| Main Authors: | , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2018
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/244551522770775674/Interest-rate-caps-the-theory-and-the-practice http://hdl.handle.net/10986/29668 |
| Summary: | Ceilings on lending rates remain a
widely used policy tool that is intended to lower the
overall cost of credit or protect consumers from exorbitant
rates. Interest rate caps come in many forms and scopes and,
according to their rationale, ceilings can affect a small
segment or the overall market. Over the past years, many
countries have introduced new or tightened existing
restrictions, while only a few have removed or eased them.
This paper takes stock of recent developments in interest
rates caps globally and classifies them according to a novel
taxonomy. The paper also presents six case studies of
different types of interest rate caps. The case studies
indicate that while some forms of interest rate caps can
indeed reduce lending rates and help to limit predatory
practices by formal lenders, interest rate caps often have
substantial unintended side-effects. These side-effects
include increases in non-interest fees and commissions,
reduced price transparency, lower credit supply and loan
approval rates for small and risky borrowers, lower number
of institutions and reduced branch density, as well as
adverse impacts on bank profitability. Given these potential
negative consequences of interest rate caps, the paper
discusses alternatives to reduce the cost of credit. |
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