Another 'French Paradox': Explaining Why Interest Rates to Microenterprises Did Not Increase with the Change in French Usury Legislation

Abstract:     
Conventional wisdom indicates that the growth of credit may not materialize if credit rates remain capped by usury laws, as had long been the case in France. France therefore abolished usury ceilings on loans to microenterprise in an effort to increase financing for microenterprises. This should have led to an increase in interest rates and increase in microcredit. However, it did not and this is therefore a paradox. This paper provides possible explanations for the paradox in terms of classical equilibrium analysis as well as behavioral and institutional analysis and softer institutional reasons.

Number of Pages in PDF File: 16

Keywords: Microfinance, Microcredit, usury, behavioral finance, law and economics, institutional analysis, interest rate

JEL Classification: B52, B59, E4, G21, K00

working papers series