Mongolian Bankers Association opposes new interest rate cap

If the new amendment to the Banking Law being discussed in Parliament is approved, it will significantly damage investment and the business environment, said the Mongolian Bankers Association (MBA) in a statement this week.

The amendment proposed by Cabinet to the Banking Law includes an article establishing a clear interest rate cap or ceiling, a regulatory measure that prevents banks or other financial institutions from charging more than a certain level of interest. MBA believes that this move will create an abnormality and cause instability in the financial sector.

MBA also said that decision could have severe repercussions such as potentially reverting Mongolia’s economic development.

“Regulatory measures to establish a ceiling for interest rates has never had their intended results in around 80 countries that have implemented similar measures. On the contrary, capping the interest rate will increase loan risks and decrease inclusion and equal access,” stated MBA.

In fact, MBA believes that such a measure could be counterproductive in that it increases interest rates instead of decreasing them as intended.

The drafters of the amendment have said that more than 74 central banks around the world employ this measure. Cabinet Secretariat and sponsor of the amendment G.Zandanshatar says that such a measure is necessary because commercial banks are essentially competing through interest rates and this has become a burden on businesses. The Cabinet Secretariat explained that the measure wouldn’t have a significant detrimental effect on commercial banks.