Interest Rate Caps, Competition, and Strategic Borrowing: Evidence from Kenya

We study Kenya’s 2016 interest-rate regulation, which capped bank lending rates but left one digital platform, called M-Shwari, exempt on the lending side while imposing a deposit-rate floor across all lenders in the market. Using borrower-level administrative data, survey data, and an RD around the implementation date, we show three main results. First, lending on the exempt platform rose, but with the safest borrowers substituting away toward cheaper capped credit. Second, riskier borrowers increase their savings to build up their credit limits. Third, on the supply side, M-Shwari raises the limits for the safest borrowers in an attempt to retain them. We build and estimate a simple model of screening and credit limit-setting to interpret these reallocations and compute welfare. The observed carve-out for M-Shwari preserves access for high-risk borrowers but yields a slight aggregate welfare decline relative to pre-policy. However, a uniform (across all lenders) interest rate cap counterfactual generates substantially larger welfare losses by entirely eliminating credit for high-risk borrowers.