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 po...
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| Language: | English en_US |
| Published: |
World Bank Group, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2014/10/20303403/interest-rate-caps-around-world-still-popular-blunt-instrument http://hdl.handle.net/10986/20494 |
| Summary: | 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. |
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