Interest rate caps can have far-reaching consequences on the composition and maturity of commercial bank loans and deposits. From both a policy and research standpoint, it is important to understand the mechanisms behind such impacts and the channels through which they affect various players in the financial sector. While cross-country evidence suggests that interest rate caps can reduce credit availability and increase costs for low-income borrowers, rigorous micro-evidence on the channels of impact within an economy is missing. In a new working paper that uses bank-level panel data from Kenya, Mehnaz Safavian and I carefully examine the impact of the recently imposed interest rate caps on the country’s formal financial sector. In September 2016, the Kenyan Parliament passed a bill that effectively imposed a cap on interest rates charged on loans and a corresponding floor on the interest rates offered for deposit accounts... — blog.wb.org/blogs