The government’s cap on microfinance interest rates—largely panned as a clumsy policy that could cripple lenders—can nevertheless be an effective signal to the industry to slow down as the public’s indebtedness rises, the Asian Development Bank’s country director said on Thursday.
Samiuela Tukuafu, speaking at the launch of the bank’s Asian Development Outlook report, said many borrowers’ poor understanding of finance could be a factor in high indebtedness including taking on loans with higher interest rates than they can handle.
“Over the last few years, we have seen a sharp increase in lending from microfinance institutions” with a wide range of rates and conditions, he said.
“This cap will certainly help in the short term to address the cost-of-borrowing concern, and the signal is for the microfinance industry to slow down,” he said.
Chou Ngeth, a senior consultant at Emerging Market Consultant, agreed that low financial literacy was a major driver of overindebtedness, and said that lenders should work to educate borrowers.
“If their clients aren’t sustained, their business won’t sustain as well,” Mr. Ngeth said.