Do interest rate caps reduce credit? Evidence from micro and small enterprise lending in Peru

Abstract

This study evaluates the impact of interest rate caps on credit supply in the micro and small enterprise (MSE) segment in Peru, a context characterized by high informational frictions and heterogeneous lending conditions. Using a panel of monthly data for municipal savings and credit institutions (CMACs) over the period 2017–2025, the analysis exploits within-institution variation across loan portfolios to identify the causal effects of the 2021 interest rate cap policy. A difference-in-differences (DiD) approach with two-way fixed effects is implemented, comparing portfolios more likely to be constrained by the cap with those that remained weakly affected. The results show that binding interest rate caps did not lead to a contraction in outstanding credit. On the contrary, treated portfolios experienced a relative expansion compared to control segments, suggesting that financial institutions adjusted through portfolio reallocation rather than credit retrenchment. These findings contrast with much of the international evidence and highlight the importance of institutional and market-specific conditions in shaping regulatory outcomes. From a policy perspective, the results imply that interest rate caps may not necessarily undermine credit supply when financial institutions retain sufficient flexibility to re-optimize their lending strategies. However, the absence of contraction in aggregate credit does not rule out potential compositional changes in borrower risk profiles or exclusion at the extensive margin, which should be carefully considered in future regulatory assessments.