Tuesday, 26 July 2022 20:40

Informal credit rate granted by loan sharks is 1,869.4% as of march 2022

Written by Evelyn Alas

The study conducted by the Centro de Investigación de la Opinión Pública Salvadoreña de la Universidad Tecnológica (CIOPS) as of march 2022 called "El crédito en el sector informal en El Salvador", showed that many informal traders do not have access to credit in formal banks, so they have to resort to paying high interest rates.

The report details that the effective annualized rate of informal credit granted by loan sharks as of march 2022 is 1,869.4% in the departments of San Salvador, Santa Ana, La Libertad, San Miguel, and Sonsonate.

This informal rate contrasts with the maximum effective interest rate published by the Banco Central de Reserva (BCR), for credit operations in the formal sector, which could not be higher than 82.7% per annum in that same month.

The study points out that Micro Pequeños y Medianos Empresarios (MIPYMES), have difficulty in accessing formal credit due to the number of requirements, filters and rate controls demanded by formal financial institutions and the urgency of the money leads them to easy credit in the informal market, granted by loan sharks.

Likewise, the analysis states that the request for loans to loan sharks has been reduced by 18% in the period from 2019-2022, although usury continues to be high in the country.   The slight decrease can be explained by several factors such as: the approval of the "Law to facilitate access to credit", which has been in force since 2020, which eliminated some barriers to access formal credit for low loan amounts.   The main destination of credit analyzed in the study is to operate a business, specifically to buy merchandise for sale; it is also used to expand one's own business, working capital to start a business, pay debts or invest in health.

In addition, the study details that the Covid-19 pandemic has worsened people's financial condition. Seven out of ten respondents will resort to informal sources of financing again in 2022.