Interest rate regulation has been applied as a public policy tool aimed at reducing the cost of credit and channeling resources toward strategic sectors. However, international evidence shows that this type of intervention often produces ambiguous outcomes and, in many cases, effects contrary to the intended objectives, particularly in the microfinance sector (Helms & Reille, 2004; World Bank, 2014).
Microfinance operates under specific structural conditions: high operating costs, geographic dispersion, borrower informality, and higher credit risk. In this context, imposing interest rate caps generate tensions between the objective of expanding access to credit and the need to preserve the sustainability of institutions serving the most vulnerable segments (Armendáriz & Morduch, 2010).
The Bolivian experience, which began in 2013 with the implementation of interest rate caps and mandatory quotas for productive and social housing loan portfolios, constitutes a particularly illustrative case. While in the short term credit expansion toward prioritized sectors was achieved, in the medium and long term persistent impacts have emerged on the profitability, solvency, and operational capacity of microfinance institutions, along with a progressive deterioration of the environment for financial inclusion (Twitmyer, 2015; Puente & Szeinfeld, 2019; Roa et al., 2020; Velasco, 2023; additionally, it is recommended to review the evolution of indicators for the Bolivian microfinance environment between the reports Global Microscope on the Microfinance Business Environment 2007 and Global Microscope 2018: The Enabling Environment for Financial Inclusion).
From the perspective of financial system functioning, distorting the price mechanism directly affects the efficient allocation of capital and alters the incentives of both institutions and borrowers. The theoretical and empirical literature consistently finds that interest rate controls tend to affect and reduce credit supply to higher-risk segments; reallocation toward safer borrowers occurs almost automatically, while innovation is pushed aside (Stiglitz & Weiss, 1981; Maimbo & Gallegos, 2014).
International evidence supports these findings. Studies in Africa and Asia show that interest rate ceilings have limited the expansion of formal credit and fostered processes of financial exclusion, as well as a return to informal financing (among others, Beck & Fuchs, 2004; FSD Kenya, 2019). Reports by the IMF and CGAP agree that, although politically attractive, interest rate controls are an ineffective instrument for promoting sustainable financial inclusion over the long term (IMF, 2019; CGAP, 2004, 2009).
In Bolivia, the combination of interest rate controls and mandatory credit allocation through portfolio quotas has increased the concentration of risks and shifted the costs of public policy onto financial institutions themselves, which ultimately absorb these costs or redistribute them across different customer segments (Trujillo & Vera, 2018; Clavijo, 2019). From this perspective, it can be argued that financial institutions, and in some cases even customers, have ended up bearing the long-term costs generated by a policy designed with a short-term horizon.
Overall, the literature converges in showing that the short-term benefits of these measures are often offset by long-term costs affecting both financial institutions and clients. From a more structural perspective, the central issue is not the level of interest rates per se, but rather the rigidity of the policy instrument and its prolonged application. In this sense, it is advisable to move toward a more flexible and dynamic regulatory framework that fosters competition, reduces structural costs, strengthens institutional efficiency, and allows interest rates to better reflect real market conditions without compromising financial inclusion objectives or innovation capabilities.
References
Armendáriz, B., & Morduch, J. (2010). The Economics of Microfinance (2nd ed.). MIT Press.
Beck, T., & Fuchs, M. (2004). Structural issues in the Kenyan financial system: Improving competition and access. World Bank Policy Research Working Paper 3363.
Clavijo, S. (2019). Regulación de tasas y concentración de riesgos en el sistema financiero boliviano. Revista Latinoamericana de Desarrollo Económico, (31), 55–80.
Consultative Group to Assist the Poor (CGAP). (2004). Interest rate ceilings and microfinance: The story so far. Washington, DC: CGAP.
Consultative Group to Assist the Poor (CGAP). (2009). Update on interest rate ceilings and microfinance. Washington, DC: CGAP
Helms, B., & Reille, X. (2004). Interest rate ceilings and microfinance: The story so far. CGAP Occasional Paper, 9.
International Monetary Fund (IMF). (2019). Interest rate caps: The theory and the practice—Lessons from international experience. Washington, DC: IMF.
FSD Kenya. (2019). The impact of interest rate caps on the Kenyan financial sector: The experience so far. Nairobi: Financial Sector Deepening Kenya.
Maimbo, S. M., & Gallegos, C. A. H. (2014). Interest rate caps around the world: Still popular, but a blunt instrument. World Bank Policy Research Working Paper 7070.
Puente, F., & Szeinfeld, H. (2019, 2 septiembre). Microfinance as a mainstay of financial inclusion in Bolivia. CAF BLOG. Disponible en https://www.caf.com/en/blog/microfinance-as-a-mainstay-of-financial-inclusion-in-bolivia/
Roa, M. J., Villegas, A., & Garrón, I. (2020). Effects of interest rate caps on microcredit: Evidence from a natural experiment in Bolivia (Working Paper No. 03/2020). Instituto de Investigaciones Económicas y Sociales Francisco de Vitoria.
Stiglitz, J., & Weiss, A. (1981). Credit rationing in markets with imperfect information. The American Economic Review, 71(3), 393–410.
The Economist Intelligence Unit. (2007). Global Microscope on the Microfinance Business Environment 2007: A pilot index and study. Economist Intelligence Unit Limited & Inter-American Development Bank. Disponible en: https://publications.iadb.org
The Economist Intelligence Unit. (2018). Global Microscope 2018: The Enabling Environment for Financial Inclusion. Economist Intelligence Unit Limited, Inter-American Development Bank, Center for Financial Inclusion, & IDB Invest. Disponible en: https://publications.iadb.org
Trujillo, E., & Vera, J. (2018). Microfinanzas y regulación de tasas en Bolivia: impactos y desafíos. Revista de Análisis Económico Boliviano, 12(2), 45–67.
Twitmyer, A. (2015). Microfinance in Bolivia: An industry evaluation (Bachelor’s Thesis). North Carolina, USA.
Velasco, C. L. (2023). Gobernanza sostenible e inclusiva en la banca de microcrédito en Bolivia: la ruta de sostenibilidad del banco boliviano BancoSol. Revista de Derecho de la UCB, 7(13), 221-265.
World Bank. (2014). Global Financial Development Report 2014: Financial Inclusion. Washington, DC: World Bank.