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Financial Inclusion and Risk in Cambodia: The Unintended Consequences of Microfinance-Lending Interest Rate Caps

By Dyna Heng, Serey Chea, and Bomakara Heng

Phnom Penh - A new study has revealed that the interest rate caps imposed on microfinance-lending in Cambodia have had an unintended impact on financial inclusion in the country.

The Unintended Consequences of Interest Rate Caps

A team of economists from the International Monetary Fund (IMF) conducted a research study to analyze the impact of interest rate caps on microfinance lending in Cambodia. The study found that the cap led to a significant increase in non-interest fees charged on new loans, resulting in a decline in microfinance borrowing among smaller borrowers.

The Effects of Interest Rate Caps on Microfinance Institutions

According to the researchers, microfinance institutions responded differently to the interest rate cap, depending on their operating costs, funding structures, and client bases. However, two years after the introduction of the interest rate cap, many institutions resumed lending to a wider group of borrowers as mobile payment development brought down operation and funding costs.

Key Findings

• The study found that microfinance institutions that relied heavily on foreign funding and had higher operating costs were more likely to increase non-interest fees in response to the interest rate cap.
• In contrast, institutions with lower operation and funding costs, such as those using mobile payment systems, were able to continue lending to a wider group of borrowers.

Implications for Policymakers

The study’s findings have significant implications for policymakers seeking to promote financial inclusion in Cambodia. “Our research suggests that regulators should consider alternative approaches to promoting access to credit, such as improving the efficiency of microfinance institutions or increasing competition in the sector,” said Serey Chea, co-author of the report.

Conclusion

The study provides valuable insights into the impact of interest rate caps on financial inclusion in Cambodia and highlights the need for policymakers to carefully consider the unintended consequences of regulations aimed at promoting access to credit.