The Effects of Usury Ceilings on Consumers Welfare: Evidence from the Microcredit Market in Colombia

Interest rate caps, also called usury ceilings, are a widely used policy tool to protect consumers from excessive charges by loan providers. However, they often cited as barrier for the advancement of financial inclusion, may reduce incentives provide loans lower-income borrowers and invest in branching networks, particularly remote isolated locations. In this paper, I exploit change ceiling applied micro-loans Colombia understand effects across geographic markets. To quantify welfare implications policy, structurally estimate demand supply model that incorporates changes size composition potential market caused change, context where distribution networks has crucial role optimal pricing strategies find generated an increase consumer surplus at national level is explained greater credit availability riskier expansion areas were previously under-served. A counterfactual exercise reveals gains associated depend greatly on additional investment opening new branches some locations needed compensate loss with subsequent interest rates after relaxation ceiling.