Effects of Interest Rate Ceiling on Sustainability of Microfinance Institutions: Lessons from Tanzania
Abstract
This study explores the effects of an interest rate ceiling on the sustainability of Microfinance Institutions
(MFIs). Based on qualitative research which entailed collection of online data from 53 respondents and
in-depth face-to-face interviews with 10 MFI practitioners in Tanzania, it is evident that an interest rate
ceiling interferes with competitive market forces. Given that MFIs vary in size, operational capacity,
customer segment and business model, applying a single blanket interest rate leads to capital and credit
diversion, hidden non-interest charges, the emergence of informal lenders and a black market, the
withholding of credit from risky markets and the closure of some MFIs. Accordingly, an interest rate
ceiling impairs the sustainability of MFIs and reduces financial inclusion. The study demonstrates that
while competition moderate interest rates, non-interest measures can be applied to protect customers from
being exploited by unscrupulous lenders.
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