Guatemala’s Anti-Usury Bill: Is it a good policy?

The debate over the anti-usury law in Guatemala, contained in Bill 6614, is framed as a defense of the most vulnerable borrower. A close reading of the text, however, points in the opposite direction: the interest-rate cap it proposes would make formal credit more expensive and less accessible precisely for the people the law claims to protect. Below we review the economic mechanism, the comparative evidence and the legal risks of the proposal.

Let us begin with Article 4, which sets the ceiling at twice the weighted average lending rate published by the Bank of Guatemala (Banguat). That figure determines everything else. In February 2024, the weighted average lending rate of the banking system, excluding credit cards, was 12.24% in quetzales, so the ceiling would stand at 24.5% per year.

The bill is presented as a protective measure for the most vulnerable and therefore seeks to restrict interest rates in order to allow access to cheaper credit. Its effect, however, is exactly the opposite. Looking at prices in the very segments the explanatory memorandum claims to protect, the Superintendency of Banks (SIB) recorded maximum credit-card rates of between 60% and 62.28% in quetzales as of 31 January 2024, while the weighted average for consumer credit hovers around 21%. Microcredit and non-bank consumer lending sit well above those levels.

The structural conclusion is twofold: the ceiling is not binding for corporate and mortgage banking, which lends at between 8% and 14%, and it is prohibitive for small, unsecured, high-risk lending. In other words, the restriction bites exactly where the law says it wants to protect.

It is worth recalling that an interest rate is a price, and that capping a price usually produces two consequences:

1. 1. Scarcity of the good or service. In this case, credit.
   2. A black market. Access to credit shifts toward illegal markets: the real usurers and loan sharks welcome the proposal.

Scarcity of the good or service. In this case, credit.

Every price is also a mechanism for conveying information. The most obvious signal of a high price is that there is a highly valued need. By restricting the price, that information is lost and we will never know who is in that situation. Who can really know what rates are charged by lenders operating outside the law, or who the borrowers paying those rates are?

There is also a technical drafting error. Article 4 invokes “concordance” with Article 1947 of the Civil Code, but that article sets no ceiling at all: it defines legal interest as the weighted average of published lending rates, reduced by two percentage points. Article 1948 allows the parties to agree on whatever interest they see fit, subject to equitable judicial reduction where it is manifestly disproportionate. The bill replaces an ex post standard under judicial control with a rigid ex ante rule, and it does so without expressly repealing Article 1948. That is not concordance, but a clear antinomy.

I- The economic mechanism behind the interest-rate cap

The price of retail credit can be expressed with the following formula:

r = funding cost + (fixed operating cost / loan amount) + risk premium + margin

Two consequences follow from this formula that a uniform cap ignores:

• • The fixed cost per transaction does not vary with the loan amount. A Q2,000 loan over six months with Q300 of origination cost implies roughly a 30% annual effective rate simply to cover costs, before risk. A 24.5% cap makes the small ticket mathematically unviable; it does not make it abusive.
  • Rationing instead of repricing (Stiglitz-Weiss). This economic law holds that if the lender cannot charge the risk premium, it does not lower the price: it eliminates the borrower. Supply adjusts through quantity, not price, and the adjustment falls on the right tail of the risk distribution.

From the standpoint of competitive dynamics, which this Congress says it wants to foster and which prompted the approval of the Competition Act, a single cap indexed to a public figure updated monthly is a perfect focal point. It eliminates price dispersion, facilitates tacit alignment and turns the legal maximum into a reference price. In other words, it standardizes the market and makes everyone charge the same, but in a way that cannot be sanctioned, because there is no collusive agreement, only independent alignment of conduct.

On top of that, a penalty regime with fines of Q20,000 to Q30,000 (Article 12) is irrelevant for a bank and lethal for a small lender. For small lenders, the mere possibility of being sanctioned raises their fixed compliance costs and consolidates incumbents; that is, it makes market entry more expensive and shields dominant players from competition. Those players can then move their prices up to the legal maximum far more easily, because they face no pressure to lower rates when no new competitors are trying to do so. A rule drafted against the banks ends up protecting them from their non-bank competitors.

II- Empirical evidence: Chile, Kenya and the World Bank

The closest natural experiment to this type of regulation is Chile in 2013, when the maximum conventional rate was cut from 54% to 36%. This is what happened:

• • Cuesta and Sepúlveda find that the policy cut contracted rates by 9%, but also reduced the number of loans by 19%. Consumer surplus fell by the equivalent of 2.5% of average income, with larger losses for riskier borrowers.
  • Madeira estimates an 8.7% drop in the probability of accessing bank credit and a counterfactual exercise showing 9.7% fewer bank consumer borrowers by the end of 2015. That means roughly 197,000 households were left outside the formal financial market. The impact was strongest among younger and less educated borrowers.
  • The World Bank documents the general pattern, which is fairly predictable: the effectiveness of rate caps tends to erode through the use of fees and non-financial charges, which reduces price transparency. Caps set below market levels reduce supply, with a particularly sharp fall in unsecured and small-ticket lending and in credit to SMEs. Average loan size increases, signaling a reallocation from small to large borrowers. Fewer institutions and lower branch density are also reported.
  • In Kenya, the 2016 controls produced the opposite of what was sought: as an unintended consequence, credit to micro, small and medium-sized enterprises collapsed and financial intermediation declined.

III- What will hinder credit: an article-by-article look

The price cap is only one of the problems. Four further provisions raise the expected cost of recovery and, therefore, the ex ante price:

• • Article 6 limits the recovery of court costs and provides that recovery commissions may not exceed 10% of the debt. Beyond amounting to a price cap on the exercise of a profession, which is contrary to the Constitution, this makes collecting a debt through legal channels practically impossible and therefore favors extralegal collection, that is, sending enforcers with bats and guns to collect debts.
  • Article 10 requires an attempted conciliation with the borrower and, if it does not take place, the claim is inadmissible. This creates an additional fixed cost per borrower. Combined with the fixed collection fee, it makes lawful judicial collection far too costly for the creditor. For small balances, the cost of collecting exceeds the loan itself, a judgment-proof effect that amounts to an incentive for strategic default. It encourages default because collection will be very difficult, which raises risk and pushes the price up. And with a price cap in place, lending to higher-risk borrowers becomes uneconomic, so they stop being served, while lower-risk borrowers who would have obtained a cheap rate see their rates rise and their available amounts shrink.
  • Article 63 Bis of the Banking Act is amended to create joint and several liability for the assigning bank for failing to inform the borrower of their rights. This creates an indeterminate obligation with unlimited joint liability and slows down the secondary market, limiting banks’ ability to sell their portfolios. Banking operations become more expensive, since banks need resources both to collect and to build risk provisions. The banking system therefore becomes more expensive for everyone, including good clients, while access is restricted for the bad clients the law was supposedly meant to help.
  • Lastly, Article 7 prohibits the capitalization of interest. Capitalizing interest is a mechanism that allows a debt to be renegotiated and moved into a different financial structure. Because it also encourages voluntary compliance by making default more expensive, banning it closes off one more avenue of recovery. The more expensive and restricted collection becomes, the higher the price of financing. And with a price cap, supply shrinks and fewer and fewer people can access formal financing.

A further structural flaw is that the bill creates an institutional asymmetry. Article 3 extends the law to any person lending “with or without legal authorization”, but Article 12 assigns enforcement to DIACO and the SIB “within the scope of their competence”. The SIB clearly does not supervise unregulated private lenders. The rule therefore creates a primary addressee, the informal lender, with no competent supervisor. It will only be enforceable against those who keep records: the formal sector. That closes the circle: in practice, the rules apply only to formal lenders, which makes legal and regulated credit more expensive and makes unregulated lending outside the legal framework far more attractive. In short, a law that helps loan sharks strengthen their business.

IV- Who actually gets hurt?

As in the spinning top game, everybody loses. The group of losers is made up of borrowers with no credit history, informal income, young people, rural households and micro-entrepreneurs without collateral, precisely the population described in the explanatory memorandum as the one to be protected.

Non-bank issuers lose: microfinance institutions, cooperatives and fintechs using alternative scoring. The World Bank’s Financial Sector Assessment Program for Chile attributes the unviability of serving that segment precisely to price caps, together with the lack of credit information and costs, and notes a striking absence of consumer fintech lenders. In short, those most in need are pushed out of the formal financing market.

Future borrowers also lose, and they are more numerous and poorer than current ones. Access to credit will be more expensive for them.

The winners are borrowers already in default: they receive a genuine ex post transfer of wealth. Established banks also win, since the cap does not restrict them and it removes competition in the expensive segment.

The informal lender, however, wins the most. The criminalization introduced by Article 14, with two to six years of imprisonment, is a cost that is simply passed on to the price. Their rate goes up, not down, and extralegal enforcement, through pressure and violence, replaces legal guarantees. With no access to legal and regulated financing, but with borrowers in urgent need of credit, illegal operators will be able to act far more freely.

The result is a regressive scheme with a progressive appearance: a visible ex post transfer to a small group and a diffuse ex ante cost borne by a large, invisible one, since loans that are never granted appear in no statistic. Loans collected at gunpoint are not reported either and, in that market, interest rates have no ceiling at all.

V- Will access to credit become more expensive?

It depends on which price is being measured: