MICROFINANCE INSTITUTIONS UNDER INTEREST RATES CEILINGS
Abstract
Microfinance institutions (MFIs) have grown fast in WAEMU surprising political decision makers. They reacted by setting up in the late 90's, a specific legislation. A legal usury rate for credits was defined fixing the borrower ceiling interest rate at 27 percent per year for microfinance institutions and 18 percent for banks. This statutory frame, fast elaborated, revealed early its incapacities and therefore, weakened structures in charge of the regulation of the sector. This structure is confronted with the difficult choice to maintain institutions outside the statutory frame or to apply a rigorous supervision and to precipitate a massive decline of MFIs. This law limits incentives to better governance, the efficiency and the flexibility expected from a good statutory frame. This paper models the behaviour of microfinance institutions in the context of interest rate ceilings and requirement of a minimal level of governance. We use comparative statics to show that a relaxation of the constraint on the usury rate does not lead necessarily to an increase of the borrower interest rate.
Domains
Economics and Finance
Loading...