Interest Rate Regulation, Credit Rationing and the Competition of Banks in Bangladesh

Authors
Yuhei Miyauchi

This project investigates the impact of the introduction of a lending interest rate cap in Bangladesh over the period 2009-2012 on bank loan supply and, in turn, firm performance. The author will also examine how the level of competition among banks affected the size of the effect of this interest rate cap on bank loan supply.

The research team will test for these effects by exploiting two sources of exogenous variation. The first is the discontinuity at the threshold of small and medium enterprises: the interest rate cap regulation was not applicable to small enterprises, and there are strict rules that determine whether a firm belongs to the "small" or "medium" enterprise category in Bangladesh. The second source of variation is the interest rate charged by banks before April 2009 (when the cap was introduced). Because the interest rate cap is uniform at 13%, the effect of the cap should be larger for banks that charged an interest rate above 13% before April 2009, while there should not be any impact on the loan supply of banks that charged a rate lower than 13% before the cap was introduced.

Authors