WILLEMSTAD/PHILIPSBURG -A maximum annual percentage rate (APR) will be included as of May 5 in the Provisions on the Disclosure of Pricing Information on Consumer Credit (APR provisions), which became effective on May 5, 2015, the Central Bank of Curaçao and St. Maarten announced on Friday.
The provisions are designed to protect consumers by providing them with adequate information to make better-informed decisions when applying for consumer credit and to foster greater transparency in the local financial market.
The development in which lenders are charging increasingly higher costs and the developments in the international regulations have led to the amendment of the APR provisions of 2015. The APR consists of the total cost of consumer credit, expressed as an annual percentage of the total credit amount. It reflects all the cost of the credit to the consumer over the duration of the credit agreement.
The Central Bank conducted extensive research in 2016, which led to a better understanding of the scope and the inherent risks within the micro-lending sector. The results of this study indicate that the micro-lending sector has an average APR of 437 per cent and a maximum APR that exceeds 3,500 per cent.
The Central Bank said these unacceptably high APRs are contrary to international standards of conduct and reflect disproportional and exorbitant interest rates. High APRs are a great cause for concern, as they can lead to a vicious cycle. For an individual, this process can result in future financial distress, while for a country, systemic breakdowns in the credit process can create problems that slow down real economic growth.
Aside from the results of the APR research, the maximum APR has also been based on the methodology for the calculation of the APR as equal to the Consumer Credit Directive of the European Commission, the APR calculation of the Dutch Authority for the Financial Markets (AFM), and the ruling of a maximum APR of 18 per cent by the Joint Court of Justice of the Netherlands Antilles and Aruba in 1999, which ruled that each percentage above 18 per cent is immoral.
Also a factor is the harmonisation of laws within the Kingdom of the Netherlands: the current maximum APRs in Bonaire, Saba and St. Eustatius and the Netherlands stands at 23 per cent and 14 per cent respectively.
The Central Bank is aware that implementing a maximum APR will have an impact on the financial sector and, although necessary for the protection of consumers, still requires a cautious approach. Therefore, to arrive at a maximum APR, the Bank also conducted meetings with the stakeholders, such as the sectors affected by the APR provisions, judges of the Joint Court of Justice, government officials and various other stakeholders.
Taking all these precautionary steps, and considering the structure and composition of the markets in Curaçao and St. Maarten, the Bank has decided to introduce a maximum APR of 27 per cent, which will become effective as of May 5, with a transition period of two months. The maximum APR will apply to all locally operating lenders in both Curaçao and St. Maarten.
The Central Bank is aware that the introduction of a maximum APR will have an impact on the supply of credit and that a shift to the informal sector can occur. However, from a supervisory perspective, the current market reflects abusive rates.
For some credit providers, capping the interest rate will have a direct impact on their earnings. If they offer less credit or change their conditions for that reason, consumers will also be affected by the capping, despite the advantage of lower interest rates.
With regard to the possible shift to the informal sector, collaboration between the Bank, Government and Prosecutor’s Office is required.
Furthermore, a recent verdict by the Joint Court of Justice in 2015 will deter institutions from shifting to the informal sector, as the ruling is a clear indication that credit granted without a permit of the Bank is annulled.