Usury Laws and Compounded Weekly Interest in the Philippines
Introduction
In the Philippine legal system, usury refers to the practice of charging excessively high interest rates on loans, which has historically been regulated to protect borrowers from exploitative lending practices. The concept of usury intersects with the rules on interest compounding, particularly when interest is compounded on a weekly basis, as this can significantly inflate the effective interest rate over time. This article explores the evolution of usury laws in the Philippines, the current regulatory framework, the permissibility and implications of compounded weekly interest, and relevant judicial precedents. It draws from key statutes such as the Civil Code of the Philippines, the Usury Law (as amended), and issuances from the Bangko Sentral ng Pilipinas (BSP), while considering the broader context of contract law and consumer protection.
The Philippine approach to usury has shifted from strict ceilings on interest rates to a more market-driven system, but with safeguards against unconscionable rates. Compounded weekly interest, while not explicitly prohibited, must comply with principles of mutuality, good faith, and equity under Philippine jurisprudence.
Historical Background of Usury Laws
The regulation of usury in the Philippines traces its roots to Spanish colonial laws, which were later formalized under American influence. The primary legislation was Act No. 2655, known as the Usury Law, enacted on February 4, 1916. This law set maximum interest rates: 6% per annum for loans without security, 14% for loans secured by real estate, and higher rates for certain chattel mortgages. Violations were penalized criminally, with fines and imprisonment for lenders charging beyond these limits.
Amendments followed, such as Republic Act No. 3765 in 1963, which adjusted rates in response to economic changes. However, the oil crises and inflation of the 1970s prompted further reforms. Presidential Decree No. 116, issued in 1973 under martial law, amended the Usury Law to allow the Monetary Board of the Central Bank (now BSP) to prescribe maximum interest rates.
A pivotal change occurred with Central Bank Circular No. 905, Series of 1982, which suspended the effectivity of Sections 1 to 4-a of the Usury Law. This effectively removed the legal ceilings on interest rates, aligning with a deregulated financial market under the influence of neoliberal economic policies. The rationale was to encourage lending and investment by allowing rates to be determined by supply and demand, rather than statutory caps.
Despite this deregulation, usury as a concept persists in Philippine law through the lens of unconscionability. Article 1306 of the Civil Code stipulates that contracts must not be contrary to law, morals, good customs, public order, or public policy. Thus, while there is no fixed usury threshold, courts can invalidate or reform interest provisions deemed excessive.
Current Legal Framework on Interest Rates
Today, the Philippines operates without a statutory usury ceiling due to the suspension under Circular No. 905. Interest rates are governed primarily by agreement between parties, as per Article 1956 of the Civil Code, which states that no interest shall be due unless expressly stipulated in writing. For loans or forbearance of money, the legal interest rate—applicable in the absence of stipulation or for judgments—is 6% per annum, as reduced by BSP Monetary Board Resolution No. 796 dated May 16, 2013, from the previous 12%.
The BSP regulates lending institutions through the Manual of Regulations for Banks (MORB) and Manual of Regulations for Non-Bank Financial Institutions (MORNBFI). These require transparency in interest disclosures, including the effective interest rate (EIR), which accounts for compounding and fees. Republic Act No. 3765, as amended by Republic Act No. 10870 (the Lending Company Regulation Act of 2007), mandates licensing for lending companies and prohibits deceptive practices.
Consumer protection laws further temper interest rates. The Consumer Act of the Philippines (Republic Act No. 7394) and the Truth in Lending Act (Republic Act No. 3765) require full disclosure of finance charges. Violations can lead to administrative penalties or civil liabilities. Additionally, the Financial Consumer Protection Act of 2013 (Republic Act No. 10623, as implemented by BSP Circular No. 857) empowers the BSP to address unfair practices, including exorbitant interest.
In microfinance and informal lending, the Credit Information Corporation Act (Republic Act No. 9510) promotes credit reporting to curb predatory lending. However, "5-6" lending schemes—common in informal sectors where P5 is borrowed and P6 repaid daily—often involve effective annual rates exceeding 100%, raising usury concerns despite deregulation.
Compounded Weekly Interest: Legal Basis and Mechanics
Compounded interest refers to interest calculated on the initial principal plus accumulated interest from previous periods. Weekly compounding means interest is added every seven days, leading to a higher effective yield than simple interest or less frequent compounding.
Under Philippine law, compound interest is permissible but subject to strict conditions. Article 1959 of the Civil Code provides: "Interest due and unpaid shall not earn interest unless the contracting parties have so stipulated in writing." Thus, compounding requires explicit written agreement. Without it, only simple interest applies.
For weekly compounding, the contract must specify the frequency. The effective annual rate (EAR) can be calculated using the formula:
[ EAR = \left(1 + \frac{r}{n}\right)^n - 1 ]
where ( r ) is the nominal annual rate and ( n ) is the number of compounding periods per year (52 for weekly). For example, a 10% nominal rate compounded weekly yields an EAR of approximately 10.51%.
The Truth in Lending Act requires disclosure of the compounding method and EIR. Failure to disclose can render the interest clause void, limiting recovery to the principal. BSP regulations mandate that banks and non-banks compute and disclose EIR inclusive of compounding.
In practice, weekly compounding is rare in formal lending due to administrative complexity but appears in short-term loans, payday advances, or credit card revolving balances. Credit card issuers, regulated under Republic Act No. 10870 and BSP Circular No. 1098 (2020), may compound interest daily or monthly, but weekly is uncommon. Informal lenders might use it implicitly in schemes like daily or weekly repayments.
Judicial Interpretations and Unconscionability
Philippine courts have played a crucial role in interpreting usury post-deregulation, focusing on unconscionability rather than fixed ceilings. In Consolidated Bank and Trust Corp. v. Court of Appeals (G.R. No. 114286, April 19, 2001), the Supreme Court held that stipulated interest rates are prima facie valid, but courts can reduce them if iniquitous or unconscionable.
A landmark case is Spouses Silos v. Philippine National Bank (G.R. No. 181045, July 2, 2014), where a 3% monthly interest (36% annually) compounded monthly was deemed unconscionable, reduced to 12%. The Court considers factors like borrower's bargaining power, economic conditions, and rate reasonableness.
For compounded weekly interest, no specific Supreme Court ruling exists, but analogies apply. In Advocates for Truth in Lending, Inc. v. Bangko Sentral Monetary Board (G.R. No. 192986, January 15, 2013), the Court affirmed the suspension of usury ceilings but reiterated judicial power to strike down excessive rates. Weekly compounding at high nominal rates could yield EARs over 100%, likely unconscionable under cases like Macalinao v. Bank of the Philippine Islands (G.R. No. 175490, September 17, 2009), where 3% monthly was voided.
Escalation clauses—allowing rate increases—are valid if mutual and not potestative (dependent solely on lender's will), per Banco Filipino Savings and Mortgage Bank v. Navarro (G.R. No. L-46591, July 28, 1987). However, they cannot justify usurious compounding without disclosure.
In criminal contexts, usury as a crime under the old Usury Law is defunct due to suspension, but estafa (swindling) under Article 315 of the Revised Penal Code may apply if deception involves hidden compounding.
Implications for Borrowers and Lenders
Borrowers facing compounded weekly interest should scrutinize contracts for compliance with disclosure rules. Remedies include filing complaints with the BSP's Consumer Assistance Mechanism or suing for reformation under Article 1359 of the Civil Code. The Securities and Exchange Commission (SEC) oversees financing companies, while the Department of Trade and Industry regulates lending under Republic Act No. 9474.
Lenders must ensure rates are reasonable to avoid judicial intervention. In corporate loans, higher rates may be tolerated due to equal bargaining, but consumer loans attract stricter scrutiny.
Special Contexts: Islamic Finance and Digital Lending
In the Bangsamoro Autonomous Region in Muslim Mindanao (BARMM), Republic Act No. 11054 allows Shari'ah-compliant finance, prohibiting riba (usury). Compounded interest is incompatible with Islamic principles, favoring profit-sharing models.
Digital lending platforms, regulated by BSP Circular No. 1105 (2021), must disclose EIR, including compounding. Apps offering weekly installment loans could face usury claims if rates are hidden.
Conclusion
While usury laws in the Philippines have evolved from rigid ceilings to flexible, market-based rates, the principle of protecting against exploitative interest persists through judicial oversight and regulatory disclosures. Compounded weekly interest, though legally allowable with written stipulation, risks being deemed unconscionable if it results in exorbitant effective rates. Parties to loan agreements must prioritize transparency and fairness to align with the Civil Code's emphasis on mutuality and equity. As economic conditions fluctuate, ongoing BSP regulations and court decisions will continue to shape this area of law, ensuring a balance between financial innovation and borrower protection.