Usury Rates in Colombia
MFTransparency’s Transparent Pricing Initiative in Colombia is meeting with great success, 22 MFIs having already submitted their data and 4 more currently underway with the data collection process.
One thing we were quick to hear about in the run-up to the launch of the Initiative in September was the upcoming Colombian Financial Superintendency‘s (SFC) publication of the new usury rates for consumer loans and for microcredits. These were officially raised that month, in the case of microcredits, from 33.93% to 36.89% and once again in the first quarter of 2011, to 39.89%.
The arguments for and against government control over interest rates are well known and, rather than delving into this debate, I would like to take this opportunity to talk about the way in which interest regulations operate in Colombia.
Usury laws have a long tradition in Colombia and breaking them incurs severe penalties. Creditors that charge current or default interest exceeding limits set by the SFC lose the right of collection on that particular transaction and their conduct, characterized as criminal under the penal code, is subject to a prison punishment of two to five years.
What is interesting about Colombian usury laws, however, is not so much their severity but how the maximum rates are set. Key to understanding this is the current banking interest rate for ordinary credit transactions, known in Colombia as the TIBC, which reflects the average rate that the banks operating in the system charge on credit transactions. On paper, the system is simple enough: Usury rates are fixed at one and a half times the TIBC.
This, however, begs the obvious question of how the TIBC is calculated. The SFC sets two different TIBCs, one covering consumer loans and the other covering loans classed as microcredit under Colombian legislation. Regulated entities in Colombia must report, on a weekly basis, all loans disbursed with their respective prices for each of these two types of credit. On the basis of this information, the SFC will calculate the weighted average effective annual rate for each category of loans, announcing a new rate every three months in the case of consumer loans, and annually in the case of microcredit.
What is interesting about this is that usury rates for MFIs in Colombia are, at least in theory, not actually set by the Colombian government at all but by the microfinance industry itself, as a function of its aggregate pricing policies. Using the SFC’s terminology, it does not “set” the TIBC (and consequently the usury rate) but it “certifies” the data sent to it by the industry, using a methodology which, according to a recent decree, must be made publicly available together with the recollected data.
However, the state has been involved in the process in recent years. The former government even froze the TIBC for four years, providing no new certifications for four years, fearing interest rates spiraling out of control. Furthermore, Asobancaria, Colombia’s association of banks and financial institutions, has criticized the choice of methodology for calculating the TIBC, in using averages weighted by loan size which, they claim, disincentivizes smaller and riskier loans while overprotecting more efficient portfolios.
Other voices more supportive of government intervention in this area have decried the SFC’s move to raise usury rates for microfinance while reducing those of consumer loans. One article in the Colombian press, for example, questioned last year the new usury rates in the context of slashed funding costs for MFIs resulting from highly expansive monetary policy. Furthermore, this has coincided with a sharp rise in the interest rates charged for microcredit, only among those institutions which specialize in this class of financial products.
Be that as it may, the TIBC is certainly a big deal in Colombia and its certification has a direct impact both on borrowers and on the profitability of the country’s MFIs. Colombia’s new President, Juan Manuel Santos, has recently signaled that he is considering eliminating TIBC-linked usury rates all together. Proposals have also been tabled to radically overhaul the system, for example, by having a single TIBC based on microloans, typically more expensive and riskier to offer, so as to ensure that institutions are able to reach those sectors of the population with a more limited access to credit. The consequences of such moves remain to be seen.
My colleague Jessica Haeussler and I will be examining these issues in more detail in an upcoming case study on microfinance regulation in Colombia and Ecuador. Please check back soon for details.