Reaping the Whirlwind: A Stock Market Event Study of Interest Rate Caps

This paper explores how national interest rate caps impact publicly traded banks and microfinance institutions (MFIs) in Kenya, Colombia, Chile, Peru, and India. In aggregate, this analysis suggests that interest rate caps do not materially impact the market capitalization of banks in these countries. The paper’s event study methodology, however, illustrates that Kenya’s interest rate cap resulted in a significant, immediate decline in financial sector valuations. Hypothesizing that Kenya’s unique situation may stem from its more stringent implementation of interest rate caps as compared to other countries, this research is critical for policymakers to understand as it provides insights into the repercussions of lending regulations and facilitates the development of credit policies that sustain economic stability.