Friday 24 September 2021

Interest Rates Caps and Debtor Exclusion

The head of the Central Bank and Sugef question the purpose that legislators want to cap interest rates

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In Costa Rica, a bill under discussion seeks caps on interest rates on loans, a measure that could lead to a reduction in credit for higher-risk borrowers.

Bernardo Alfaro (left) and Rodrigo Cubero (right) appearing this week before the legislative committee on tax affairs

As part of the discussion in the Legislative Assembly, the heads of the Central Bank of Costa Rica (BCCR), Rodrigo Cubero, and the General Superintendence of Financial Entities (Sugef), Bernardo Alfaro, were asked to give their views on the content of the proposed bill.

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Both officials agree that setting interest rate ceilings will lead to changes in the local market, as the financial system could exclude some clients and also some incentives would be lost.

Alfaro told Elobservador.cr that “… If the main purpose of the rate (of usury) is the protection of the consumer, then the rate must be set at the extreme prices; but if the caps on interest rates are a policy instrument, to achieve a lower cost of credit, the rates are compromised.”

Cubero explained that “… Establishing maximum limits on interest rates could have effects such as foreclosure, given a reduction in supply for the riskiest debtors. This is according to international evidence. Those most affected are lower-income financial clients and micro and small businesses, since transactions are more expensive and have a higher risk profile, and they have no guarantees. Exclusion leads to the loss of traceability of operations, with a direct effect on taxation.”

The comments were made before the Committee on Tax Affairs of the Legislative Assembly.

Both defended the methodological calculation that would set the interest cap around 45% and that has been questioned by some legislators.

Cubero highlighted the World Bank’s findings on the experience of caps on interest rates around the world, with two common findings:

  • Exclusion of the poorest
  • Increase in the total cost of credits, through commissions and others
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“This is why the rate must be high enough, to avoid exclusion and determine the crime of usury (…) Always with the understanding that this rate is set at a level that avoids abuse and minimizes financial exclusion,” said Cubero.

He also said that the usury rate must be over an effective rate, not a nominal rate, as it must include costs and commissions, which is the most real calculation.

The president of the Central Bank emphasized that the World Bank has recommended alternative measures such as promoting financial education and strengthening the Credit Information Center, where all debts are recorded.

In the coming weeks, legislators will continue to discuss the issue, as the aim is to adopt a legal framework to sanction those who charge fees outside the market.

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