Case Study: Interest Rate Cap in WAEMU Countries
MFTransparency’s methodology is a combination of pricing data collection and dissemination as well as education and training. As part of our growing set of educational materials, we are working on developing a series of case studies to highlight interesting examples of pricing practices and policies we observe around the world.
One interesting pricing disclosure policy we’ve observed is the WAEMU usury cap on microloan pricing. I have been conducting research and interviews on this policy as part of a case study on how this cap was developed, implemented and what impact it has on the WAEMU microfinance markets.
WAEMU countries established an interest rate cap for the microfinance industry in 1997, three years after the PARMEC law that established the official existence of microfinance in the region (1997). A cap for interest rates is not something new in the region as there was already a usury rate applied to banks and all financial institutions before microfinance started officially in the region. The WAEMU countries inherited an interest rate cap from the French law that governed these countries at the time of colonization.
The cap for microfinance is set at 27% annual interest rate, and the central bank (BCEAO) and the Ministry of Finance are responsible for enforcing this law. This cap was established in order to protect clients from usury. The sanctions are tough, including jail time from 2 months to 2 years with a fine from 100 000 CFA to 5 000 000 CFA and possible closure of the financial institution.
It is widely known that this cap was created when the microfinance industry was funded mostly by grants and a lot of government support. Now the industry is commercializing, so an assessment is necessary to see if this cap is still relevant and effective. Many people in the industry fear that the cap as it is now could harm the industry instead of protecting clients by preventing financial institutions from being able to offer the smallest loans to the poorest clients sustainably.
What effects has this law had on the microfinance industry in reality? How well do microfinance institutions (MFIs) understand it? How strongly is it enforced? This law is still under development, with many important changes being considered as a direct result of evaluations of the law in practice. It will be important to consider how different stakeholders have been impacted by the law, and to really understand its requirements, in order to follow its ongoing development.
In my case study I will attempt to answer some of these questions, incorporating the insight of active players within the industry. My objective with the study is both to enhance the understanding of the growing markets of the WAEMU as well as learn from this example as regulators of microfinance markets around the world consider their options for developing policy for responsible pricing. Check back for a link to the full case study once it’s finalized in the coming weeks.