Chile's Anti-Compound Interest Rule Risks Harming Savers and Borrowers
A recent prohibition on compound interest, enacted as part of a major reform in Chile, may inadvertently harm the very individuals it aims to protect. Compound interest, known as 'anatocismo' in Spanish, is not solely a collection tool but also a vital mechanism for growing savings in time deposits and savings accounts. Removing it entirely could diminish the returns for millions of Chileans who rely on simple financial instruments for housing and retirement funding. Furthermore, the banking sector is unlikely to absorb the increased risk of not capitalizing interest on delinquent loans without consequence. Instead, banks may pass this risk onto all borrowers through higher initial interest rates, making mortgages, consumer loans, and small and medium-sized enterprise (SME) financing more expensive. The likely outcome could be reduced access to formal credit and increased financial exclusion, rather than less debt. The Financial Market Commission (CMF) has highlighted the substantial implementation costs associated with this prohibition. Before outright banning the practice, it would be more prudent to refine existing limitations.
The prohibition of compound interest in Chile, ostensibly to protect consumers, presents a complex economic trade-off. While intended to curb predatory lending practices, the measure could inadvertently reduce the attractiveness of savings instruments for ordinary citizens and increase borrowing costs across the board. This situation highlights a systemic tension between consumer protection and the functioning of financial markets, where interest capitalization plays a dual role in both risk management for lenders and return generation for savers. The CMF's warning about implementation costs suggests a potential for unintended consequences that could outweigh the intended benefits. Future policy considerations might explore more nuanced regulatory approaches, such as tiered interest rate caps or enhanced disclosure requirements, to balance financial inclusion with consumer safeguards, particularly in the context of an evolving digital economy where financial products are increasingly sophisticated.
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