Rate Caps Research Articles

Regulating Carry Trades: Evidence from Foreign Currency Borrowing of Corporations in India

Abstract We establish that macroprudential controls limiting capital flows can curb risks arising from foreign currency borrowing by corporates in emerging markets. Firm-level data show that Indian firms tend to issue more foreign currency debt when the interest rate differential between India and the United States is higher. This “carry trade” relationship, however, breaks down once regulators institute more stringent interest rate caps on borrowing; in response, riskier borrowers cut issuance most. Prior to adoption of this macroprudential measure, stock price exposure of issuers to currency risk rises after issuance, as witnessed during the “taper tantrum” episode of 2013; this source of vulnerability is nullified by the measure, as confirmed during the October 2018 oil price shock and the COVID-19 outbreak. We find no evidence of the policy’s efficacy being undermined by leakage or regulatory arbitrage.

Assessing the Challenges affecting SMEs' access to Bank Loans in Zambia, a case of Lusaka Town Centre

This research aimed to evaluate the difficulties SMEs face in obtaining credit from banking institutions. Using a descriptive research design, primary data was collected from various SME respondents through a structured, self-administered questionnaire. The literature review, sourced from journals and other materials, provided a deeper understanding of the subject. Data analysis was conducted using frequency tables and descriptive graphics with the assistance of SPSS for data entry, coding, and analysis of quantitative data from closed-ended questions. The findings revealed that while access to credit positively influenced SME performance by enabling proprietors to increase business stocks or acquire assets, significant challenges impeded access to credit. These challenges included inadequate collateral, limited borrowing capacity, high interest rates and processing fees, and stringent terms and procedures. These barriers hindered SMEs' ability to expand, improve cash flow for reinvestment, and ultimately reduced profitability. To address these issues, the researcher recommended that the government, through the Bank of Zambia, consider capping interest rates for SMEs or providing subsidized loans. Additionally, they suggested strengthening the Zambia Credit Guarantee Scheme Limited to offer loan guarantees for SMEs, recognizing their crucial role in the economy. The study recommended that Government create interest Rate Caps where the government should work with the Bank of Zambia to establish an interest rate ceiling for SMEs, making loans more affordable and promoting business growth and stability. Develop subsidized loan programs for SMEs to lessen the impact of high interest rates and processing fees, thereby helping them secure the capital needed for expansion and operational improvements. Enhancing the Credit Guarantee Scheme requires you to improve the structure and operations of the Zambia Credit Guarantee Scheme Limited to provide SMEs with easier access to loan guarantees, addressing issues related to inadequate collateral and limited borrowing capacity.

Assessing the Challenges Affecting SMEs' Access to Bank Loans in Zambia, a Case of Lusaka Town Centre

This research aimed to evaluate the difficulties SMEs face in obtaining credit from banking institutions. Using a descriptive research design, primary data was collected from various SME respondents through a structured, self-administered questionnaire. The literature review, sourced from journals and other materials, provided a deeper understanding of the subject. Data analysis was conducted using frequency tables and descriptive graphics with the assistance of SPSS for data entry, coding, and analysis of quantitative data from closed-ended questions. The findings revealed that while access to credit positively influenced SME performance by enabling proprietors to increase business stocks or acquire assets, significant challenges impeded access to credit. These challenges included inadequate collateral, limited borrowing capacity, high interest rates and processing fees, and stringent terms and procedures. These barriers hindered SMEs' ability to expand, improve cash flow for reinvestment, and ultimately reduced profitability. To address these issues, the researcher recommended that the government, through the Bank of Zambia, consider capping interest rates for SMEs or providing subsidized loans. Additionally, they suggested strengthening the Zambia Credit Guarantee Scheme Limited to offer loan guarantees for SMEs, recognizing their crucial role in the economy. The study recommended that Government create interest Rate Caps where the government should work with the Bank of Zambia to establish an interest rate ceiling for SMEs, making loans more affordable and promoting business growth and stability. Develop subsidized loan programs for SMEs to lessen the impact of high interest rates and processing fees, thereby helping them secure the capital needed for expansion and operational improvements. Enhancing the Credit Guarantee Scheme requires you to improve the structure and operations of the Zambia Credit Guarantee Scheme Limited to provide SMEs with easier access to loan guarantees, addressing issues related to inadequate collateral and limited borrowing capacity.

Market Power and the Transmission of Loan Subsidies

Abstract We study a large-scale Brazilian loan subsidy program to expand long-term credit. The government subsidizes banks’ funding costs for lenders, who then allocate credit to firms at regulated interest rates below a maximum ceiling. We propose and test a mechanism allowing banks to circumvent the rate caps and capture part of the subsidy. We show that when issuing a subsidized loan, lenders with market power use a cross-product pricing strategy, whereby they increase the price of other products to the same client. Our results have important policy implications for the design and effectiveness of government interventions in credit markets. (JEL G21, H81, E43) Received: 15 March 2023; Editorial decision: 13 April 2024 Editor: Robert Marquez

The Territorial Cohesion through Interisland Transport: An In-Depth Analysis of the Azores Autonomous Region

This study investigates inter-island accessibility in the Azores Islands (Portugal), a region marked by unique territorial fragmentation and significant distances between islands. Recognizing the pivotal role of sea and air transport in fostering the socioeconomic development of the archipelago by enhancing resident mobility and attracting tourism, we address the challenges posed by the region’s low demographic and economic influence and the pronounced imbalances among islands. The methodological approach involves the examination of various accessibility parameters, with a specific focus on hourly operations identified as presenting the most unfavorable ratios of time availability in the destinations. We analyze inter-island sea and air schedules during the winter season, emphasizing their relevance for residents engaged in travel for business, health, administration, and related purposes. We have mainly analyzed the air schedules since it was possible to make the round trip on the same day on only two maritime routes, although these have also been considered. Regarding the study outcomes, they reveal that despite positive efforts to implement air public service obligations (PSO), which mandate specific frequencies, seat allocations, and rate caps, among other examples, the limited attention given to adapting operating hours based on demand undermines the effectiveness of these measures. Contextually, this lack of adjustment results in substantial inconvenience for travelers, particularly those engaged in round-trip operations on the same day, a common scenario in inter-island mobility. In more than 70% of the operational routes, suitable travel times at the destination are significantly compromised.

Law and order? Associations between payday lending prohibition and alternative financial services use by degree of enforcement

AbstractSixteen jurisdictions in the United States prohibit payday lending through stringent usury laws or well‐established nonprofitable 36% interest rate caps. Yet over one in 10 consumers residing in these jurisdictions borrowed payday loans in the past 5 years. This raises questions about actual policy implementation and enforcement. We employ data from the 2018 National Financial Capability Study to investigate if associations between payday lending prohibitions and payday borrowing differ by degree of enforcement. We find that nuances in degree of enforcement among restrictive states are not associated with payday borrowing likelihoods. However, these nuances appear when examining payday borrowing frequency, particularly when controlling for consumers' financial circumstances and when conditioning on alternative financial services consumers. We consistently note the highest borrowing behaviors for states sans regulation. Policymakers may consider strengthening enforcement in cases where the primary goal is preventing or reducing payday borrowing.

Implementation of the mechanism of systemic risk internalisation in the deposit market (pigou tax principle)

The deposit guarantee fund’s rate cap mechanism was supplemented by a systemic risk fee based on the Pigou tax principle. The additional systemic risk fee was introduced to curb overly aggressive price competition in the deposit market by creating additional explicit financial costs that can offset the gains to individual banks from increasing their deposit market share. However, the existing inelasticity of the implemented mechanism, manifested by the lack of stable pressure across the entire range of rates, necessitates its reform. In this article the authors reveal the details of the implemented mechanism of internalisation of systemic risk in the deposit market, the reasons that prompted its implementation, assessment of its success and ways of further reform.

Do interest rate caps on microfinance loans result in higher MFI efficiency A study of Indian MFIs using data envelopment analysis

Do interest rate caps on microfinance loans result in higher MFI efficiency A study of Indian MFIs using data envelopment analysis

Regulation and agriculture financing in Kenya

PurposeThe agricultural sector remains the backbone of several emerging economies, including Kenya, where it contributes 34% to its gross domestic product (GDP). However, access to financing for agricultural activities appears to be very low compared to developed economies. Following this, governments in a number of countries have sought to introduce banking sector regulations to facilitate increased funding to the agricultural sector. Taking motivation of the interest rate capping regulations by the Central Bank of Kenya (CBK) in 2016, this paper examined the effect of these interest rate ceiling regulations on agri-lending in Kenya.Design/methodology/approachThe paper employs random effects technique to estimate a panel data of 26 commercial banks in Kenya from 2014 to 2018 using the ratio of loans to agricultural sector to gross loans and the natural logarithm of loans to agricultural sector as proxies for agri-lending. Bank size, equity, asset quality, liquidity, revenue concentration and bank concentration are employed as control variables.FindingsThe results of the panel regression estimations show that the introduction of the interest cap resulted in increases in the proportion and growth in agri-lending compared with the pre-interest cap period. In addition, large banks and highly capitalised banks were found to be associated with lower agri-lending, with differences in the effects across pre-cap and post-cap periods.Practical implicationsFrom a policy perspective, the findings highlight the effectiveness of interest rate capping in meeting this objective and supports the calls for strengthening cooperation between the government and key stakeholders in the financial sector. This will allow for the effective enforcement of policies by the regulatory powers in a manner that guarantees sound and dynamic financial systems, particularly within the agricultural sector.Originality/valueAs far as the authors are aware, this the first paper to examine the effect of the interest rate cap regulation on agri-lending in Kenya.

Epistemic othering: the interplay of knowledges in legislative drafting

AbstractIn this article, we use the concept of epistemic othering to describe the subjectivation of people who experience debt problems in the legislative drafting process, and argue that the evidence‐based policy paradigm, together with its participatory dimension, produce a potentially harmful subject position for people who are considered vulnerable and irrational. By analysing the preparatory material of Finnish interest rate cap laws, we explore what is constructed as rational and possible in the legislative process, and how these modalities frame the use of expert knowledge. We argue that what is considered rational is constructed in terms of market logic, and what is construed as possible is heavily framed by law‐as‐knowledge. Together, market logic and law‐as‐knowledge form the preconditions for the use of expert knowledge. Ultimately, the way in which these three types of knowledge interact contributes to the epistemic othering of people who experience debt problems.

Credit for me but not for thee: the effects of the Illinois rate cap

Credit for me but not for thee: the effects of the Illinois rate cap

2023 Review of Resource Adequacy of the Poverty Reduction and Growth Trust, Resilience and Sustainability Trust, and Debt Relief Trusts

This paper provides an integrated perspective across the Trusts of the Fund. It is the first annual review that combines discussion of the adequacy of the resources of the Fund’s Poverty Reduction and Growth Trust (PRGT) and debt relief trusts, including the Catastrophe Containment and Relief Trust (CCRT), with that of the Resilience and Sustainability Trust (RST). The review of the PRGT assesses recent developments for lending demand, fundraising, and interest rates and compares them to the baseline projections underpinning the July 2021 reforms. A multi-pronged strategy is proposed to address identified strains on PRGT finances while minimizing negative effects for PRGT borrowers and preserving the confidence of PRGT lenders. On the recently established RST, this paper reports its fundraising progress; discusses demand developments and outlook for RST financing; assesses adequacy of loan resources and reserves; and examines, in view of increases in the SDR interest rate, the implications of adopting an interest rate cap at 2¼ percent for the lowest income group eligible for RST borrowing.

Impact of Global Fuel Price Volatility on the Korean Electric Sector: Market Risk Estimation and Electricity Rate Cap

This paper investigates the challenges that the Korean electric sector has encountered in 2022 under a regulated framework different from market-based approaches. The Ukraine-Russia war caused chaotic circumstances in every aspect of the global economy, and the energy market was not an exception. Every nation has been struggling in 2022 to secure its energy needs due to the supply chain disruptions associated with the geopolitical issues, as well as to minimize the economic impact. As electricity is a derivative product from fuels, it has serious vulnerability to fuel price volatility, unless the nation is self-sufficient in energy supply with 100% renewable energy sources or equivalent alternatives. When an electric market is deregulated with open market competition, the market cost of goods is simply passed through to end customers. However, it may not be the same case for a regulated utility that is subject to the rules set by public agencies. Korea Electric Power Corporation (KEPCO), a Korean public utility, has made every effort to stay away from bankruptcy due to its deficit of KRW 3 trillion (U$ 24 billion) in 2022. The main reason for the deficit is the regulated electric rate cap that KEPCO must charge to retail customers for the wholesale power purchased at market rates from the Korea Power Exchange. The price disparity may be explained by the year-on-year change in October: the rate cap is up 22% as opposed to the wholesale market price spike of 89%. This paper analyzes price diversions or volatilities of eight comparable asset classes, from a DJIA stock to the Korean electricity prices, in a historical context (January 2018-August 2022), and applies current fuel market parameters to estimate the value-at-risk, or price change, in Korea electricity prices to understand the estimated divergence between the two prices.

Interest Rate Caps, Segmented Markets, and Microfinance: A Cautionary Tale from Zambia

Interest Rate Caps, Segmented Markets, and Microfinance: A Cautionary Tale from Zambia

Effects of Illinois' 36% Interest Rate Cap on Small-Dollar Credit Availability and Financial Well-being

Effects of Illinois' 36% Interest Rate Cap on Small-Dollar Credit Availability and Financial Well-being

Asymmetric information in peer-to-peer lending: empirical evidence from China

This paper examines how asymmetric information affects peer-to-peer lending in China. We find that default rates rise significantly with interest rates. Specifically, borrowers who select interest rates above the legal maximum private lending rate of 15.4% are more likely to default. A lack of interest rate caps to prevent adverse selection is responsible for the market failure of Chinese peer-to-peer lending. However, there is no strong evidence of the moral hazard effect in relation to interest rate and loan size. In addition, the credit scoring based on applicant characteristics can mitigate the asymmetric information problem, but not eradicate it completely.

The cost of rate caps: Evidence from Arkansas

AbstractRegulated small‐dollar installment lenders do not operate within Arkansas, but they do in all six states that border Arkansas. We can measure the effects of Arkansas' 17% interest rate cap because Arkansas residents obtain installment loans only from out‐of‐state lenders. On average, Arkansas residents borrow $1051 at an annual percentage rate of 93%, when incorporating travel costs. Arkansas residents borrow at a rate of 90.4 loans per 10,000 people, compared to 524.5 per 10,000 for residents of the six bordering states. Residents in Arkansas counties that border other states hold 96.7% of out‐of‐state‐supplied small‐dollar installment loans. Statistical tests confirm that the interest rate cap affects residents in the interior counties of Arkansas more than it does residents in the perimeter counties.

Credit to Private Sector, Corruption Perception and Economic Growth of Comesa Countries

Credit to Sector private is known as financial resources given to the private sector, including loans and advances, non-equity securities purchases, trade credits, and other receivables, that establish a claim for recovery. In a variety of ways, financial institutions contribute significantly to people's socio-economic development. The relationship between economic growth and credit to private sector has attracted attention among scholars in the recent past who have articulated empirical and theoretical studies on the relationship between economic growth and credit to private sector. Corruption has been rampant among COMESA counties. This article incorporated the moderation effect of corruption in the private sector access to credit and found that, tough positive, corruption does not influence credit to private sector. This can be alluded to the fact that, any investor not necessarily bribe to get credit for the business. To improve credit access, the cost of credit must be reduced, the interest rate cap removed, and the collateral registry must be expedited. The insufficiency of credit expansion had a negative impact on economic growth in countries in COMESA trading bloc.

Selected Issues In The Taxation Of Swaps, Structured Finance and Other Financial Products

This article is based on a paper presented by the author to the Tax Review of New York City on November 16, 1992.The last decade has seen an explosive growth in the use of swaps and other derivative products as part of the asset and liability management strategies of corporations and other institutional investors. Beginning with interest rate and currency swaps, the menu of swap products has expanded to include commodity swaps, equity index swaps, equity swaps, total return swaps, basis swaps, and interest rate caps, floors and collars. According to industry sources, the market for interest rate swaps has grown in notional principal amount from an estimated $3 billion in 1982 to over $3.065 trillion by the end of 1991 (the most recent figures available). Similarly, the outstanding aggregate notional principal amount of currency swaps has grown from $182 billion in 1987 to $807 billion by the end of 1991.At the same time as the swap market has been expanding, the structured finance market, including mortgage and asset securitization, has seen similar growth. Beginning in the 1970s, U.S. government-backed enterprises such as the Government National Mortgage Association ("Ginnie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") sponsored transactions in which pools of residential first mortgages were bundled into pass-through certificates that were then sold to thrifts, banks and other institutional investors. In 1983, Freddie Mac introduced collateralized mortgage obligations ("CMOs"). CMOs, which divided up the cashflows from an underlying pool of mortgages into separate debt securities having different maturity, interest rate and credit characteristics, dramatically broadened the market for mortgage-backed securities. With the enactment of the "Real Estate Mortgage Investment Conduit" ("REMIC") provisions as part of the 1986 Tax Reform Act, the taxation of mortgage pass-through and pay-through securities became subject to a new, self-contained set of rules. Moreover, since the mid-1980s, structured finance techniques originally employed in securitizing mortgages have been applied to a broad range of other financial assets, including stocks, credit card receivables, auto loans, lease receivables, home equity loans, commercial and industrial loans and trade receivables.

THE MODERATING ROLE OF FINANANCIAL INNOVATIONS ON THE RELATIONSHIP BETWEEN INTEREST RATE CAP AND ACCESS TO CREDIT BY MICRO, SMALL AND MEDIUM ENTERPRISES IN KISUMU COUNTY

Purpose: The purpose of this study was to investigate the moderating role of financial innovations on the effect of monetary interventions on access to credit by micro, small and medium enterprises in Kisumu County, Kenya. The specific objectives were to assess the effect of interest rate cap on access to credit by MSMEs and to investigate the moderating role of financial innovations on the effect of interest rate cap on access to credit by MSMEs in Kisumu. This study was guided by the Keynesian Liquidity Preference Theory.
 Methodology: The study adopted a descriptive research design with a target population of the 1,472 micro, small and medium enterprises registered at the Department of Social Services in Kisumu County, Kenya. At a confidence level of 95%, a representative sample of 420 MSMEs was obtained based on Yamane Taro’s formula. A closed ended questionnaire was administered to a stratified sample of the finance managers of the micro, small and medium enterprises. A Cronbach’s alpha of 0.801 confirmed the reliability of the instrument while its validity was assessed by expert opinion of finance professionals. Data was analyzed using regression analysis.
 Results: Results showed that interest rate cap had a statistically significant effect on access to credit by micro, small and medium enterprises. Further, financial innovations moderated the relationship between interest rate cap and access to credit. The study concluded that MSMEs’ access to credit depended on the direct and the hierarchical effects of interest rate cap and also that financial innovations moderated these effects.
 Unique contribution to theory, practice and policy: The study recommends that the MSMEs could save with commercial banks to enable them access credit made available through lower interest rates unlike those charged by MFIs. Also, they should take advantage of financial innovations at their disposal to enable them access credit cheaply and fast. The policy makers ought to aim at enhancing access to credit by employing sector specific interventions as opposed to blanket interventions like cushioning MSMEs from high interest rates by providing such funds as funds for inclusion of the informal sector (FIIS) and should also derive policies targeting on improving the process and role of financial innovations in the relationship between interest rate cap and access to credit by MSMEs in Kenya. The study supported the Keynesian liquidity preference theory by positing that interest rates are controlled by the rise and fall of supply and demand for money and should be allowed to adjust freely. This theory could therefore be applied to similar studies.