Interest Rates: Caps and Debtor Exclusion

In Costa Rica, a law initiative under discussion seeks to set caps on interest rates on loans, a measure that could lead to a reduction in the offer of credit for debtors classified as higher risk.

Wednesday, January 29, 2020

As part of a bill being discussed in the Legislative Assembly, the heads of the Central Bank of Costa Rica (BCCR) and the General Superintendence of Financial Entities (Sugef) were asked to give their views on the content of the proposal.

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.

Bernardo Alfaro, head of the Sugef, 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."

Rodrigo Cubero, president of the BCCR, 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."

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

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