How Kenya’s Interest Rate Caps Transformed Mobile Lending and Competition

A major new study by researchers from the Massachusetts Institute of Technology (MIT), MIT Sloan School of Management, the University of California San Diego, and the National Bureau of Economic Research (NBER) has shed fresh light on Kenya’s controversial 2016 interest rate cap policy. The research explores how the government’s attempt to make loans cheaper ended up reshaping the country’s fast-growing digital lending market in unexpected ways.

In 2016, Kenya introduced a law that capped bank lending rates at levels far below what banks had previously charged. The goal was simple: protect consumers from expensive loans and improve access to affordable credit. At the same time, the law also guaranteed minimum returns for savers through a deposit-rate floor.

But one major player escaped the lending cap, M-Shwari, Kenya’s biggest mobile lending platform.

How M-Shwari Became Different

M-Shwari, launched through the M-PESA mobile money system, had become hugely popular by allowing people to save and borrow directly from their phones. Millions of Kenyans relied on it for quick, unsecured loans without needing collateral or a traditional banking history.

Unlike banks, M-Shwari used mobile phone activity and mobile money transactions to create credit scores for customers. Borrowers who saved regularly and repaid loans on time could gradually increase their borrowing limits.

When the government imposed interest rate caps, most banks and digital lenders linked to banks were forced to sharply reduce their lending rates. However, M-Shwari was exempt because its loan charges were officially classified as “facilitation fees” instead of interest rates.

This created a rare situation where one lender could continue charging high borrowing costs while competitors had to offer much cheaper loans.

Borrowers Split Into Two Groups

The study found that the policy changed borrower behavior almost immediately.

Safer borrowers with stronger credit scores moved away from M-Shwari because rival banks were suddenly offering cheaper loans. Riskier borrowers, however, experienced the opposite problem. Since lower interest rates reduced profits, competing lenders became more cautious and stopped lending to many higher-risk customers.

As a result, many risky borrowers turned to M-Shwari because it remained willing to lend to them despite charging higher fees.

The researchers found that loan activity on M-Shwari increased after the interest caps took effect. First-time borrowing rose sharply, and more people depended on the platform for credit. In effect, M-Shwari became a fallback lender for customers who could no longer qualify elsewhere.

Saving More to Borrow More

The study also uncovered another important trend: borrowers started saving more money on M-Shwari after the caps were introduced.

This happened because savings balances influenced future borrowing limits on the platform. Customers who feared being rejected by other lenders began using savings as a strategy to improve their chances of accessing loans.

The researchers describe this as “strategic saving.” Instead of saving mainly for security, many customers were saving specifically to maintain or increase borrowing power.

At the same time, M-Shwari adjusted its own strategy. The platform raised credit limits for safer customers in an effort to stop them from switching to cheaper competitors. This showed how lenders responded not only through pricing but also through tighter screening and selective incentives.

The Hidden Cost of Interest Rate Caps

The study’s most important conclusion is that interest rate caps can produce unintended consequences, especially in digital lending markets.

While the policy succeeded in making loans cheaper for lower-risk borrowers, it also pushed many higher-risk customers out of the formal lending system. According to the researchers, if M-Shwari had also been forced to follow the cap, many risky borrowers would likely have lost access to formal credit completely.

The researchers argue that Kenya’s experience highlights the difficult balance between consumer protection and financial inclusion. Making loans cheaper may sound beneficial, but strict price controls can also discourage lenders from serving vulnerable borrowers.

The study suggests that governments may need more targeted solutions instead of broad interest rate ceilings. Policies focused on supporting high-risk borrowers, improving credit information, or encouraging responsible lending could prove more effective than simple caps on lending rates.

For Kenya, the research offers an important lesson for the future of digital finance: regulating modern mobile lending markets is far more complex than simply lowering interest rates.