Bill capping lending rates to limit credit access without stopping usury, say bankers

Monday, August 1, 2011

A looming bill to cap interest rates charged by Salvadorian financial institutions will freeze out low-income groups from the market without stopping predatory lending, according to local banking association ABANSA.

"We consider that the fixing of the rates doesn't constitute the most efficient mechanism to protect consumers from usury," ABANSA director Marcela de Jiménez told BNamericas.

"Fixing the rates without a technical analysis could cause various counterproductive effects in credit access and social welfare - above all, those in the lower-income segments."

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The proposal to cap interest rates is expected to be presented to El Salvador's parliament later in August, the president of the parliament's financial committee, Francisco Zablah, told BNamericas.

The measure is designed to stop predatory lending and alleviate the growing problem of indebtedness in the country. It is supported by the ruling left-wing coalition, which counts with a parliamentary majority.


"We're very worried that what this law would really do is increase the activity of individuals and institutions that are outside the law.... Never has such a law been able to regulate these [grey] segments," de Jiménez said.

In late July, ABANSA united with the representative bodies of other financial institutions in the country, such as cooperatives and savings unions, to present a single statement to parliament against maximum rates.

The statement argues for greater transparency and increased competition as preferred means of lowering interest rates for consumers.

Banking managers believe that the government's targeting of formal financial firms ignores the crux of the problem, namely the unregulated lenders in El Salvador.

"The proposed law against usury will only complicate life for the regulated entities. The usurers themselves won't be affected," said Benedikt Hoffmann, CEO of El Salvador's largest microfinance lender, ProCredit.

Hoffmann believes lending of up to US$3,000 will be particularly affected by the capped rates, as firms have to charge the highest rates in that segment to hedge against high default risk.

"Some firms may withdraw from that segment. And, at least for a few months, this could paralyze that section of the market," he added.

"I don't think that they [the government] are that worried about consumer credit. It's a political theme, and they're looking for a scapegoat."