Usury Laws and Compounded Weekly Interest in the Philippines: A Comprehensive Overview

Introduction

In the Philippine legal framework, usury refers to the practice of charging excessive or illegal interest rates on loans. Historically rooted in moral and economic considerations, usury laws aim to protect borrowers from predatory lending while balancing the needs of lenders in a market economy. The concept of compounded weekly interest, where interest is calculated and added to the principal on a weekly basis, intersects with these laws, raising questions about legality, enforcement, and economic impact. This article explores the evolution of usury regulations in the Philippines, the current legal status, specific provisions on compounded interest, judicial interpretations, and practical implications for lenders and borrowers. It draws on statutory provisions, Bangko Sentral ng Pilipinas (BSP) regulations, and key Supreme Court decisions to provide a thorough analysis.

Historical Evolution of Usury Laws

The foundation of usury regulation in the Philippines traces back to the Spanish colonial period, but modern laws began with Act No. 2655, known as the Usury Law, enacted in 1916. This statute set a maximum interest rate of 12% per annum for secured loans and 14% for unsecured loans. Violations were punishable by fines or imprisonment, reflecting a strong policy against exploitative lending.

Post-independence, the Usury Law underwent significant amendments. In 1974, Central Bank Circular No. 416, issued under the authority of Presidential Decree (PD) No. 116, adjusted the ceiling to 12% per annum across most loan types. However, economic pressures, including inflation and the need for credit liberalization, led to further changes. PD 1684 in 1980 and subsequent BSP issuances began to relax these ceilings.

A pivotal shift occurred in 1982 with Central Bank Circular No. 905, which effectively suspended the interest rate ceilings under the Usury Law for most transactions. This deregulation was intended to align with market-driven rates, promoting financial sector growth. The Supreme Court upheld this in cases like Banco Filipino Savings and Mortgage Bank v. Court of Appeals (G.R. No. 129227, 2000), affirming that parties could agree on any interest rate as long as it was not unconscionable.

Today, the Usury Law remains on the books but is largely inoperative due to these suspensions. Instead, interest rates are governed by the New Civil Code (Republic Act No. 386), particularly Articles 1956 to 1961, which allow stipulated interest rates unless they violate public policy.

Current Legal Framework on Interest Rates

Under the New Civil Code, interest on loans must be expressly stipulated in writing to be enforceable (Article 1956). If no rate is specified, the legal interest rate applies: 6% per annum on the principal from the time of judicial demand, as per BSP Monetary Board Resolution No. 796 (2013), which reduced it from the previous 12%.

For stipulated rates:

There is no fixed usury ceiling for most loans, credit extensions, or forbearances.
However, rates must not be "iniquitous or unconscionable," as determined by courts on a case-by-case basis. The Supreme Court in Spouses Silos v. Philippine National Bank (G.R. No. 181045, 2013) struck down a 30% annual rate as excessive, reducing it to 12%.
Escalation clauses, which allow rate increases, are valid but must include de-escalation provisions and be tied to objective factors like BSP prime rates (Article 1308, Civil Code; Banco Filipino v. CA, supra).

Specific sectors retain caps:

Pawnshops: Regulated by PD 114 (Pawnshop Regulation Act), with a maximum of 2.5% per month (30% annually).
Credit cards: BSP Circular No. 1098 (2020) caps monthly interest at 2% (24% annually), with additional finance charges limited.
Microfinance and small loans: Subject to Republic Act No. 9474 (Lending Company Regulation Act) and BSP oversight, emphasizing fair practices.

Penalties for usury violations, though rare due to deregulation, include nullification of excessive interest clauses and potential criminal liability under the Revised Penal Code (Article 315, estafa) if fraud is involved.

Compounded Weekly Interest: Legal Permissibility and Calculations

Compounding interest weekly means calculating interest on the principal plus accrued interest every seven days, leading to higher effective yields than simple interest. The New Civil Code permits compounded interest under Article 1959: "Interest due shall earn legal interest from the time it is judicially demanded, even though the obligation may be silent on this point." However, for stipulated compounded interest, it must be explicitly agreed upon in the contract.

In the Philippine context:

Compounding is allowed if mutually consented and not unconscionable. Weekly compounding is not inherently illegal but can result in effective annual rates (EAR) that courts scrutinize.
Formula for compounded weekly interest: ( A = P \left(1 + \frac{r}{52}\right)^{52t} ), where ( A ) is the amount, ( P ) is principal, ( r ) is nominal annual rate, and ( t ) is time in years. For example, a 12% nominal rate compounded weekly yields an EAR of approximately 12.68%.
BSP regulations, such as Circular No. 730 (2011), require transparent disclosure of effective interest rates in loan agreements to prevent hidden usury.

Judicial oversight is critical. In Development Bank of the Philippines v. Family Foods Manufacturing Co. (G.R. No. 180458, 2009), the Court invalidated compounded penalty interest exceeding reasonable bounds. Weekly compounding in short-term loans, common in informal lending or payday schemes, often borders on usury if rates push EAR above 30-50%, as seen in cases involving "5-6" lending (a informal practice charging 20% per month, effectively over 240% annually).

Judicial Interpretations and Landmark Cases

The Supreme Court has played a key role in interpreting usury and compounding:

Medel v. Court of Appeals (G.R. No. 131622, 1998): Declared a 5.5% monthly rate (66% annually) usurious and void, emphasizing borrower protection.
Spouses Almeda v. Court of Appeals (G.R. No. 113412, 1997): Upheld compounded interest but reduced excessive rates to legal levels.
Eastern Shipping Lines, Inc. v. Court of Appeals (G.R. No. 97412, 1994): Established guidelines for legal interest compounding: 12% (now 6%) from judicial demand, compounded annually unless stipulated otherwise.
Recent decisions, like Nacar v. Gallery Frames (G.R. No. 189871, 2013), updated legal interest to 6% and clarified compounding in judgments.

Courts consider factors like borrower's sophistication, bargaining power, and economic conditions when assessing unconscionability.

Regulatory Oversight and Enforcement

The BSP, as the primary regulator under Republic Act No. 7653 (New Central Bank Act), monitors interest practices through:

Truth in Lending Act (Republic Act No. 3765): Mandates full disclosure of finance charges, including compounding methods.
Consumer Protection Framework: Circular No. 1048 (2019) prohibits unfair collection and excessive rates in consumer loans.
Anti-Usury Board: Though defunct, its functions are absorbed by BSP's Supervisory Enforcement Department.

Enforcement involves administrative sanctions, cease-and-desist orders, and referrals to the Department of Justice for criminal prosecution. Borrowers can file complaints with BSP's Consumer Assistance Mechanism or seek civil remedies in courts, including annulment of contracts and restitution of excess payments.

Special Considerations in Compounded Weekly Interest

Weekly compounding is prevalent in:

Informal sectors: "Bombay" or "5-6" lenders often compound daily or weekly, leading to debt traps. Republic Act No. 10927 (Anti-Money Laundering Act amendments) and BSP Circulars target these.
Digital lending: Fintech platforms under BSP Circular No. 1105 (2021) must cap rates and disclose compounding, with weekly options common for microloans.
Islamic finance: Shari'ah-compliant products avoid interest altogether, using profit-sharing instead (Republic Act No. 11439).

Risks include exponential debt growth; a P10,000 loan at 20% annual nominal rate compounded weekly could accrue to P12,209 in one year, versus P12,000 simple.

Economic and Social Implications

Deregulation has boosted credit access but increased inequality, with low-income borrowers vulnerable to high compounded rates. Studies by the Philippine Institute for Development Studies highlight how weekly compounding exacerbates poverty cycles. Policy debates call for reimposing ceilings, but BSP favors market mechanisms with strong consumer safeguards.

Conclusion

Usury laws in the Philippines have evolved from rigid ceilings to a flexible, court-supervised regime, where compounded weekly interest is permissible if transparent and reasonable. While deregulation fosters economic growth, protections against unconscionable practices remain robust through civil, regulatory, and judicial channels. Lenders must prioritize compliance, and borrowers should scrutinize terms to avoid pitfalls. Ongoing reforms, influenced by global trends like sustainable finance, may further refine these rules to balance innovation with equity.