A New Law against Credit Usury Shakes the Financial Markets in Costa Rica

A law recently passed by the Costa Rican Legislative Assembly that seeks to combat usury rates on credit and microcredit is stirring the financial market in this country, and even a bank announced layoffs and the closure of thousands of credit cards.

In Costa Rica, the crime of usury was already typified but without specifying from what percentage, so the Assembly decided to legislate on it, at a time when the COVID-19 Pandemic is causing damage to employment, people’s incomes and the economy in general.

The law, which came into effect on June 20th, imposed a maximum interest rate of 39% for all loans, except microcredits, which are loans of less than 675,000 colones (about $ 1,160), for which the cap will be 55%. The Central Bank of Costa Rica (BCCR) must apply a mathematical formula to set the maximum rates twice a year: in January and July, the law states.

Last Friday the Central Bank published the cap that will govern during this second half of the year: loans in colones will have a maximum rate of 37.69% and in dollars 30.36%. While the rate for microcredits in colones will be 53.18% and 42.99% in dollars.

The law, which punishes the crime of usury with financial fines and up to three years in prison, also requires the creation of a comparability index, through which the client can compare the offer of credits and their market rates in a specific place.

In summary, it is a law that offers a series of protections to the consumer, however, it does not eliminate the obligations that the latter has to be careful in the management of their finances, the due study of their account statements, and, above all, the responsible use of indebtedness”, said the general director of the office of the financial consumer, Danilo Montero.

The Financial Sector Is Shaking

The first bank to react was the “BAC Credomatic”, which announced that as a result of the new law coming into force; it will abolish 187,526 credit cards for 79,789 customers, as these operations become deficient. The entity also announced the dismissal of 373 workers and the closure of 11 service points.

The “Caja de ANDE”, a financial institution for educators, informed its affiliates that it will stop granting loans to people who have a liquid salary of fewer than 200,000 colones (350 dollars), as this is required by the new law. Other financial institutions have assured that they will comply with the provisions of the law, but have not yet reported any major implications for their operation.

At the end of last April, the General Superintendence of Financial Entities (SUGEF) warned that the setting of a usury rate “could be counterproductive given the current situation that is being experienced worldwide as a result of the Pandemic.” According to SUGEF, a ceiling on interest rates “will limit access to credit for the riskiest sectors” and could cause “greater financial exclusion”.

A Population in Debt

Official data indicates that in 2019 the installments for the payment of credits represented 64% of the disposable income per capita monthly. In 2015, that percentage was 50% and was closer to the parameter suggested by financial authorities, which is between 35% and 40%. These figures could worsen in 2020 with the effects of the COVID-19 Pandemic.

As for credit cards, data from the Ministry of Economy indicate that in April 2020 the debt balance represented 3.53% of the country’s GDP. In Costa Rica, a country of 5 million inhabitants, some 2.9 million credit cards were circulating this April.

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