This study examines the effects of the imposition of an interest rate ceiling in April 2017 on credit cost, loan size, and informal credit in Cambodia’s rapidly growing microfinance sector, based on a household survey conducted in August and September 2019. From our analyses, we confirm past evidence that indicates that the average interest rate was reduced, but the average loan assessment and processing fee increased after the ceiling imposition. However, our results confirm the decline in the average effective interest rate (interest rate plus loan assessment and processing fee) after the ceiling imposition. The results also show an increase in the average size of loans from formal sources at a relatively small loan level, and an increase in the percentage of loans from informal sources. Monitoring of informal credit activities is important to mitigate the adverse consequences of the ceiling imposition.
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In our discussion hereafter, MFIs refer to deposit-taking microfinance institutions, non-deposit taking microfinance institutions, and rural credit institutions.
MFIs data published by the National Bank of Cambodia (NBC). https://www.nbc.org.kh/english/economic_research/mfis_reports.php. Accessed 17 July 2020.
The double-bottom-line issue can lead to the so-called ‘mission drift’ in microfinance. That is, MFIs may move away from poor to better-off borrowers.
Bateman et al. (2019) provided a good documentation of critical assessments of socio-economic consequences of microfinance activities in various countries such as Bangladesh, Brazil, Cambodia, Colombia, India, Mexico, Morocco, Peru, and South Africa.
The impact of ceiling imposition may also include an increase in the need for monetary authorities to deploy their resources to supervise MFIs and enforce compliance with the ceiling, as argued by Ferrari et al. (2018). However, the examination of such effects is beyond the scope of our study and data availability does not allow us to do so.
This is true, at least, for the case of Cambodia. However, in some countries such as Thailand, not only the interest rate, but also the loan fees are subject to a legal ceiling rate as documented by Zetzsche and Dewi (2018). Our discussion does not hold for such a case.
The dataset used in this study is available upon request.
The criteria of a household having access to an MFI loan before or after the imposition of the interest rate ceiling is based on the contract date of the loan. For instance, if a household has a loan contract before the ceiling imposition on April 1, 2017, this household is considered to have had loan access before the ceiling, even if that loan maturity may last until the period after the ceiling. A loan whose contract date is April 1, 2017, or after, is considered as a loan after the ceiling. This is consistent with the loan criteria mentioned in the ceiling policy by the NBC.
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The variance inflation factors (VIFs) of explanatory variables in our estimation equations are also calculated to examine the multicollinearity issue. The results, available upon request, showed that, except for the average age of household members and its squared term, the VIFs of explanatory variables are smaller than ten, indicating that there is no significant problem of multicollinearity. When the average age of household members and its squared term are incorporated in the estimation equation, it is common that their VIFs are very large. However, it should not be problematic for this case, since the two variables are not a linear transformation of each other. Furthermore, since the standard errors in our quantile regression are obtained by the bootstrap method, the estimation results are heteroskedasticity-robust ones.
From our survey, about three-fourths of those who are aware of the existence of the interest rate ceiling answered that they knew about it from MFIs’ credit officers.
By using MFI data and information for the analysis, the World Bank (2019) found that the imposition of an interest rate ceiling resulted in a decline in the average credit cost, but it was partly offset by an increase in loan fees.
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This research is mainly supported by JICA Ogata Research Institute and partially supported by Grant-in-Aid for Scientific Research (C), No. 18K01604 and No. 18K01641. We would like to thank the Cambodia Microfinance Association and the Credit Bureau of Cambodia for their support. We acknowledge the comments and suggestions from the participants of workshops held by the National Bank of Cambodia and the Cambodia Microfinance Association. We would like to thank an associate editor and anonymous reviewers for their helpful comments and suggestions. We are solely responsible for any errors that may appear in this paper. Any result discussions and interpretations in this study are ours and do not reflect the views of our affiliated institutions.
Conflict of interest
This research is a part of the project “The Study on the Promotion of Financial Inclusion in Cambodia” of and financially supported by the JICA Ogata Research Institute. It is also partially supported by Grant-in-Aid for Scientific Research (C), No. 18K01604 and No. 18K01641.
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An earlier version of this paper was circulated under the title “Impacts of the Interest Rate Ceiling on Microfinance Sector in Cambodia: Evidence from a Household Survey”.
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Samreth, S., Aiba, D., Oeur, S. et al. Impact of the interest rate ceiling on credit cost, loan size, and informal credit in the microfinance sector: evidence from a household survey in Cambodia. Empir Econ 65, 2627–2667 (2023). https://doi.org/10.1007/s00181-023-02443-5