Interest rate caps and their impact on financial inclusion

Abstract

The recent introduction of a lending rate ceiling for banks and other financial institutions in Zambia reopened an old debate over the appropriateness of regulatory intervention to limit the charging of rates that are deemed, by policymakers, to be excessively high. This short paper studies the theory behind interest rate caps and aims to answer the following questions: Where are interest rate caps currently used, and where have they been used historically? What have been the impacts of interest rate caps, particularly on expanding access to financial services? What are the alternatives to interest rate caps in reducing spreads in financial markets?