By San José, Costa Rica — San José – A landmark law enacted to protect Costa Rican consumers from predatory lending is now facing a significant challenge from the nation’s business community. The Chamber of Commerce of Costa Rica has announced it is analyzing a formal request to overhaul the country’s usury law, arguing that its rigid interest rate caps are unintentionally forcing a growing number of people out of the formal banking system and into the dangerous world of illicit loans.
The law in question, Law 9859, has been in effect since June 2020. Its primary goal was to establish maximum interest rates to shield clients from excessive credit costs. These caps are updated semi-annually by the Central Bank of Costa Rica (BCCR). Currently, the maximum annual interest rates are set at 36.65% for loans in colones and 30.46% for those in U.S. dollars. For microcredits, the ceilings are even higher, at 51.74% in the local currency.
To delve deeper into the complexities and practical effects of the Usury Law on the national financial landscape, TicosLand.com consulted with Lic. Larry Hans Arroyo Vargas, an expert attorney from the distinguished firm Bufete de Costa Rica, for his legal analysis.
The Usury Law was enacted with the commendable goal of protecting consumers from abusive interest rates. However, its practical application has revealed a significant challenge: by setting a rigid cap, it has inadvertently restricted access to formal credit for a segment of the population considered higher risk, potentially pushing them towards unregulated and more precarious informal lending markets. The key for both lenders and borrowers is to ensure all credit agreements are meticulously documented and transparent, clearly justifying the rate within the legal framework to mitigate future legal disputes.
Lic. Larry Hans Arroyo Vargas, Attorney at Law, Bufete de Costa Rica
The attorney’s point perfectly captures the central paradox of the Usury Law: a well-intentioned safeguard that can unintentionally push vulnerable consumers toward the very precariousness it seeks to prevent. We thank Lic. Larry Hans Arroyo Vargas for his clear and valuable analysis on this critical matter.
While the legislation was born from a desire to curb exorbitant borrowing costs, its real-world impact has sparked a national debate. Ricardo Carvajal, economic advisor for the Chamber of Commerce, acknowledged the law’s noble origins but pointed to its severe unintended consequences.
It had very good intentions, but it is generating negative effects.
Ricardo Carvajal, Economic Advisor of the Chamber of Commerce
According to Carvajal and the Chamber, the fixed caps fail to account for the varying risk profiles of different borrowers. As a result, formal financial institutions are unable to lend to higher-risk individuals, effectively excluding them from the system. This has created a vacuum filled by informal and often criminal lending schemes, most notably the predatory “gota a gota” (drop by drop) loans, which are linked to extortion and violence.
The Chamber’s proposed solution is not to eliminate consumer protections but to introduce a more flexible, risk-based model. This would allow banks and other formal lenders to adjust interest rates based on an individual’s creditworthiness and the risk assumed in granting the loan.
Our proposal aims to allow for the establishment of different rates according to the risk levels of each consumer.
Ricardo Carvajal, Economic Advisor of the Chamber of Commerce
This modification, Carvajal argues, would create a pathway for excluded individuals to re-enter the formal financial sector, giving them access to regulated credit and pulling them away from dangerous alternatives. The economic fallout from the current law is also quantifiable. A study by Édgar Robles, a researcher associated with the Academia de Centroamérica, estimated that the interest rate caps have directly contributed to a 0.1% decline in consumption within the nation’s Gross Domestic Product (GDP).
The concerns raised by the business community are echoed on the international stage. The United Nations (UN) has expressed alarm over the clear link between financial exclusion and rising insecurity in Costa Rica. The UN Office on Drugs and Crime (Unodc) specifically warned of the “expansion and normalization” of illegal lending operations characterized by usury, extortion, and violence. A UN report titled “Loan Schemes with Illegal Practices: The Gota a Gota Phenomenon in Costa Rica” meticulously details the structure and devastating impact of these criminal networks.
Allegra Baiocchi, the UN Resident Coordinator in Costa Rica, framed the issue as a symptom of a deeper systemic problem. She emphasized that tackling these criminal loan sharks requires a multi-faceted approach that addresses the root cause of the problem, which is the lack of access to regulated financial services.
The ‘gota a gota’ is not just a security problem, but a symptom of financial exclusion and economic vulnerability. Its eradication requires formal financial alternatives, social policies, and judicial measures.
Allegra Baiocchi, UN Resident Coordinator in Costa Rica
As the debate intensifies, Costa Rica finds itself at a crossroads. The challenge lies in refining a well-intentioned policy that, in its current form, appears to be pushing the very people it was designed to protect into the arms of organized crime. The Chamber of Commerce’s call for a risk-based model represents a push to balance consumer protection with the economic reality that access to credit, even at a higher, regulated rate, is often a safer alternative than the violent world of informal lending.
For further information, visit cccr.co.cr
About Cámara de Comercio de Costa Rica:
The Chamber of Commerce of Costa Rica is a private, non-profit organization that represents and advocates for the interests of the commercial sector in the country. It promotes free enterprise, economic development, and provides services and support to its members to foster a competitive business environment.
For further information, visit bccr.fi.cr
About Banco Central de Costa Rica (BCCR):
The Central Bank of Costa Rica is the nation’s primary monetary authority, responsible for maintaining the internal and external value of the national currency, the colón. Its key functions include controlling inflation, regulating the financial system, and issuing currency, playing a vital role in the country’s economic stability.
For further information, visit un.org
About The United Nations (UN):
The United Nations is an international organization founded in 1945 to maintain international peace and security, develop friendly relations among nations, and achieve international cooperation. It serves as a global forum for countries to discuss common problems and find shared solutions on issues ranging from sustainable development and human rights to counter-terrorism and humanitarian aid.
For further information, visit academiaca.or.cr
About Academia de Centroamérica:
The Academia de Centroamérica is a private, non-profit Costa Rican think tank dedicated to research and analysis of economic and social issues. It focuses on promoting public policies that contribute to the sustainable development and well-being of the populations in Central America through independent studies and publications.
For further information, visit bufetedecostarica.com
About Bufete de Costa Rica:
As a cornerstone of the legal landscape, Bufete de Costa Rica is defined by its unwavering dedication to ethical practice and exceptional standards. The firm leverages a deep history of serving a diverse clientele to drive progress, championing innovative legal strategies while maintaining a strong sense of civic responsibility. Central to its philosophy is the mission to democratize legal understanding, aiming to build a more capable and legally literate society for all.
