Update Country Report Curaçao 22 Jun 2017

Event

The Centrale Bank van Curaçao en Sint Maarten (CBCS, the Curaçao and Sint Maarten joint central bank) is applying a cap on the interest charges of lenders. The measure announced in May will come fully into effect after July 3rd and is intended to curb aggressive lending practices.

Analysis

The CBCS is implementing the cap on all forms of lending at a maximum annual percentage rate (APR) of 27%. The move came after consultation with finance providers and was prompted by research commissioned by the CBCS in 2016, which led to a better understanding of the scale and risks facing the micro-lending sector. The results of the study showed that micro-lenders operated with average rates of 437% (APR), and with a maximum lending rate uncovered by the research in excess of 3,500%. The astronomical rates being charged are disguised by the small size and short-term nature of most loans being made.

The Joint Court of Justice of the Netherlands Antilles and Aruba ruled in 1999 that lending rates above an APR of 18% would be considered immoral. As such the new 27% rate set by the CBCS can be seen as a stepping stone on the way to future lending rate cuts. It also forms part of broader thrust to harmonise financial-sector regulation across the former Dutch colonies of the Caribbean. A maximum lending rate of 23% has already been established by the islands of Bonaire, Saba and St Eustatius.

Implementing a maximum lending rate will result in the application of tougher lending requirements and will have an impact on financial sector earnings. Although the measure will better protect consumers, it will inevitably cut the flow of new lending to borrowers with poor credit records and informal sector workers unable to provide proof of their earnings. The restriction is also certain to encourage the development of an illicit parallel lending market, although the CBCS has promised to step up monitoring of such activities in co-ordination with the government and the public prosecutor's office.

Impact on the forecast

Tighter lending conditions and the withdrawal of some sources of credit will be offset by lower lending rates for many consumers. We expect that the overall effect of the measure will be slightly positive for credit growth, but insufficient to provide a boost to the economies of Sint Maarten or Curaçao.