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The Securities and Exchange Commission’s (SEC) proposal to slash the effective interest-rate (EIR) ceiling for unsecured small loans — from 15% to 10% per month (it could be higher depending on data and market consultations) — marks the most significant overhaul of short-term consumer credit pricing since the 2022 cap was introduced.
With the draft circular expanding coverage to loans up to P20,000 and terms as long as six months, the reform reframes the economics of digital and application-based lenders whose business models rely on high-velocity, high-risk portfolios that are priced close to the existing ceiling. The SEC argues that the reform is essential to arrest predatory pricing, hidden-fee structures, and debt-trap cycles that continue to proliferate despite two years of regulatory tightening.
What makes the debate unusually intense is that both the regulator and the industry are correct on the facts. The SEC is right that borrowers remain vulnerable to opaque pricing and harassment from fringe operators. Lenders are equally right that cutting the EIR ceiling by a third, while expanding the coverage net, will compress margins across the riskiest segments, potentially shrinking supply and pushing liquidity-starved borrowers back toward the informal “5-6” lending market. The political imperative is that the government wants visible consumer-protection wins — but the practical risk is equally real: price caps that overshoot can trigger credit rationing long before they discipline abusive practices.
The outcome will reverberate across the financial ecosystem. If the SEC maintains the proposed cap, lenders will have to rewrite risk models, recalibrate borrower acquisition, and redesign products around larger tickets and stronger credit profiles. If the agency softens the blow through transitional mechanisms or targeted exemptions, the reform becomes evolutionary rather than disruptive. Either way, the Philippine credit market is entering a reset phase — one that tests whether regulatory ambition and market realities can find a workable equilibrium.
Once again, the SEC is at the center of a battle that pits regulatory principle against market economics.
Its proposal to cut the EIR cap for unsecured small loans from 15% to 10% (or maybe higher) per month appears, on its surface, to be a straightforward consumer-protection measure. But beneath that politically attractive headline lies a far more complex recalibration of the Philippine credit ecosystem — one that could redefine pricing, reshape risk appetites, and redraw the boundaries between formal lenders and the informal “5-6” underground lending economy that regulators have long sought to displace.
The SEC’s move is not happening in a vacuum. It comes three years after the 2022 price cap attempted to bring order to a rapidly expanding universe of digital, application-based, and algorithm-driven lenders offering high-velocity microcredit to millions of Filipinos.
Those caps were meant to curb the most abusive practices — triple-digit monthly charges, stacked fees, and harassment-driven collection methods — but the market adapted faster than regulators expected. Borrowers continued to complain of hidden charges and debt-trap cycles, while operators found ways to push total loan costs toward the maximum legal envelope. In that sense, the SEC’s newest proposal functions as a correction to a correction: the regulator believes the initial cap reduced excesses, but not enough to protect financially fragile households who remain trapped in high-cost borrowing loops.
The draft circular’s most significant shift is not merely the numerical cut from 15% to 10% (or higher) EIR, but its expansion of the regime itself. Loans up to P20,000 and terms up to six months would now fall under the tightened ceiling, broadening regulatory reach at precisely the moment lenders face smaller pricing headroom. This dual move acts like a pincer: a wider net with a lower roof.
For lenders whose economics depend heavily on high-yield, short-duration credit, the haircut is meaningful. Annualized returns — already expensive by global standards — shrink by roughly one-third, while default risk, fraud costs, and servicing expenses remain stubbornly high.
Will the math hold?
This is the crux of the industry’s objection.
Their argument is not that borrowers should pay 20% or 30% per month — those days are already over — but that small-ticket, high-risk loans cannot be profitably offered at scale when the legal ceiling decreases at the same moment coverage expands.
In boardrooms and investor calls, executives warn that the math simply will not hold: lenders will tighten approval rates, raise minimum loan sizes, exit marginal municipalities, or pull back entirely from customers with informal incomes and erratic repayment histories. And when regulated lenders retreat, the informal market fills the vacuum quickly and ruthlessly. It is a pattern observed in economies from India to Indonesia to Kenya when rate caps undershoot risk-adjusted pricing realities.
The SEC, however, is equally grounded in its reasoning. Under the Financial Products and Services Consumer Protection Act (RA 11765), the agency is legally obligated to ensure affordability, transparency, and fairness in pricing — not merely to allow lenders to price risk as they see fit.
From its vantage point, the persistence of borrower complaints, the rise of opaque fee structures, and the continued prevalence of digital harassment practices signal that market discipline alone is insufficient. The proposed 10% (or higher) cap is thus framed as a calibrated intervention, not an ideological one: a level high enough to allow credit to flow, yet low enough to blunt predation.
The inclusion of a 100% total-cost cap — no borrower should ever owe more than double what they borrowed — is another sign of a regulator attempting to close loopholes that turned many microloans into revolving traps.
But this tug-of-war between regulatory virtue and market viability is precisely where the Philippine credit sector must decide: is it going to build an inclusive future or sleepwalk into a credit desert? If the cap is implemented as written, lenders will likely pivot toward larger-ticket, lower-risk borrowers, where underwriting visibility is stronger and portfolio losses are more manageable.
That transition will leave millions of informal workers — tricycle drivers, street vendors, domestic helpers, construction laborers, and home-based sellers, among them — stranded between underpriced formal credit and overpriced informal sources. The irony is that strengthening consumer protection at one end may unintentionally worsen financial vulnerability at the other.
Between regulation and market
This SEC proposal has certainly ignited a rare, full-front collision between regulatory intent and market reality. Consumer advocates are cheering. Lenders are bracing. But the louder — and more relevant — signal comes from the real world: countries that tried similar caps discovered that the poorest borrowers often suffered the most.
That’s the uncomfortable truth beneath the Philippine reform: it is motivated by real abuses, but may inadvertently recreate the very problem it seeks to solve.
To understand why, it’s necessary to examine not only the numbers but the history. The Philippines is not the first country to attempt an aggressive interest-rate ceiling in the name of consumer protection. Kenya did it in 2016 with a cap tied to the central bank rate. Cambodia imposed strict fee and interest controls on microfinance institutions in 2017. India experimented with a rigid pricing band for microfinance in 2011. All three countries promised the same thing the SEC is promising today: lower costs, safer borrowing, less predation.
Instead, each one triggered a contraction that hit poor people first.
When caps can shrink markets
- Consider Kenya, where the 2016 Banking (Amendment) Act capped lending at no more than 4% above the Central Bank of Kenya’s benchmark rate. The law was politically popular — borrowers had long rebelled against double-digit loan rates — but the aftermath was brutal. Almost overnight, banks pulled out of low-income and small and medium-sized enterprise (SME) segments. A World Bank study in 2018 found that access to formal credit for micro and small businesses fell by nearly 25%, while digital lenders jumped in to fill the vacuum—charging even higher effective rates because they were not legally defined as “banks.” Within three years the cap was repealed; regulators admitted it had hurt the most vulnerable borrowers.
- Cambodia followed a similar arc. In 2017, regulators imposed a hard cap of 18% annual percentage rate (APR) on microfinance institutions, a drastic reduction from historical borrowing costs in rural provinces. Microfinance institutions (MFIs) responded by increasing loan sizes, pivoting to collateralized lending, and abandoning high-risk villages. The United Nations (UN) and several development agencies later flagged a disturbing trend: small rural borrowers were taking larger loans than they needed just to meet new minimum thresholds. The cap did not reduce debt burdens; it simply distorted the market.
The Philippines is now poised to test the same dynamic in an even more complex environment: a country where over 70% of the workforce participates in the informal economy and where digital lenders — regulated and unregulated — coexist in the same neighborhoods, often targeting the same customers.
For years, much of the microfinance and digital lending universe relied on high yields to compensate for inefficiencies in risk scoring, limited borrower data, manual collections, and operational drag. A 15% monthly ceiling gave many operators room to grow even without investing aggressively in technology or analytics.
But that comfort also created complacency. The SEC’s proposed 10% (or higher) cap threatens this equilibrium not because it destroys viable models, but because it forces players to build what they should have built long ago: precision underwriting, automated workflows, robust fraud monitoring, and data-driven customer segmentation.
We are no stranger to markets that leapfrog forward when pressure is applied. The explosion of mobile payments after the pandemic, the mainstreaming of digital banks, the rise of e-commerce logistics — these transformations did not occur because incumbents wanted change, but because the environment demanded it. Lending is now reaching a similar pivot. With tighter caps on the horizon, the companies that thrive will be those that innovate faster than the regulatory curve.
How it works
Imagine a fictional Amelia, the sari-sari store owner in Caloocan who regularly borrows P5,000 to replenish her inventory.
Under traditional underwriting, Amelia is a risk profile defined by guesswork: informal income, no pay slips, limited credit history. But under an innovation-driven regime, she becomes a data point in a far richer picture. Her transaction velocity, mobile-wallet usage, telco behavior, inventory turnover, supplier payments, and even seasonal demand patterns can now be integrated into alternative credit models. Lenders that invest in these tools can approve Amelia at sustainable margins despite a lower interest ceiling. Those who refuse to evolve will simply exit the customer segment—and yield the opportunity to others.
A similar transformation awaits SMEs like another fictional RDR Transport Solutions in Valenzuela. Today, their loan approvals often hinge on manual processes, paper-based financials, and in-person verification. But an ecosystem shaped by a 10% (or higher) cap will compel lenders to adopt automated bank-statement analysis, cash-flow forecasting algorithms, fleet telemetry scoring, and artificial intelligence (AI)-driven risk clustering. The companies willing to reinvent credit assessment will serve SMEs faster, more cheaply, and more profitably than any legacy model ever allowed.
Globally, regulatory constraints have often produced technological breakthroughs.
Kenya’s banking amendment acts, significantly impacted M-Pesa, a widely used mobile-phone money transfer payments, and microfinancing service, launched in 2007 by Safaricom (part of the Vodacom Group) for people without access to formal banking. Kenya’s rate caps inadvertently fueled M-Pesa’s agent-banking expansion and catalyzed digital lending models that were later refined into sustainable, low-cost products.
India’s regulatory tightening on microfinance pushed the industry toward biometric Know Your Customer (KYC) via the Aadhaar Enabled Payment System (AePS), a digital system allowing basic banking services (withdrawals, deposits, transfers, balance checks) using the user’s Aadhaar number and biometrics (fingerprint/iris) for authentication, bypassing cards or personal identification numbers (PINs), especially in rural India, resulting in reducing operating costs by more than half.
Indonesia’s Otoritas Jasa Keuangan (OJK), an independent government agency that regulates and supervises the country’s banks, capital markets, and other financial institutions, implemented reforms that spurred financial technology (fintech) consolidation and encouraged platforms to adopt machine learning for fraud detection, slashing default rates while expanding inclusion.
Credit re-engineering
If the Philippine industry responds with similar fervor and ambition, the country could witness a comparable re-engineering of credit.
The SEC’s reform, viewed through this lens, is not merely a cap — it is a forcing mechanism. It demands efficiency where inefficiency once hid behind high margins. It rewards platforms that modernize, automate, and scale. It pressures lenders to strengthen governance, eliminate abusive practices, and compete on transparency. And most importantly, it invites the industry to move beyond the old tension between high-risk borrowers and high-cost credit.
Yet there is another side to this story, one that deserves acknowledgment. Left unchecked, the microcredit market of the past decade was drifting toward increasingly aggressive tactics. Some lenders charged processing fees that exceeded interest itself. Others accessed borrower contacts without consent, weaponized shame, or provided misleading disclosures about total loan costs.
A system like that is not sustainable, and strong regulatory intervention was inevitable. By attempting to reset boundaries now, the SEC may be forcing a recalibration that the market itself had postponed for too long.
The challenge, however, is timing. Lowering caps before the ecosystem is fully ready—before credit bureaus are universal, before digital IDs are ubiquitous, before enforcement fully reaches illegal players—risks shrinking the formal credit pool while leaving informal channels untouched. Borrowers may find themselves navigating a narrower set of legitimate options, even as unregulated lenders continue operating with impunity.
This is why the SEC’s willingness to consult, revise, and iterate is crucial. The agency has publicly stated that the draft circular is not final, that comments are welcome, and that the goal is to balance access, sustainability, and fairness. That openness is not a sign of indecision; it is a recognition that the Philippine credit economy is a living organism, not a spreadsheet. Getting the reform right requires calibration, not rigidity.
The Philippines can, in theory, achieve what few emerging markets have managed: a credit landscape where borrowers are protected without being displaced, where lenders behave responsibly without being driven out, and where affordability improves without sacrificing availability. But this balance will not emerge automatically. It will require the SEC to monitor portfolio contractions carefully, adjust rules when needed, and continually tighten its crackdown on illegal lending operations that thrive whenever formal markets narrow.
In that sense, the SEC’s 10% (or higher) cap is not a constraint, but a catalyst. It is a challenge to lenders to innovate their way into sustainability rather than price their way into survival. It is a reminder that financial inclusion cannot depend indefinitely on expensive credit. Moreover, it is an opportunity for the Philippines to build a modern, data-powered lending system worthy of a digital economy.
If the reform succeeds, the Philippines could become a case study in how consumer protection and financial inclusion can reinforce each other. If it stumbles, the country risks learning the same lesson its peers did—that price caps without structural readiness can shrink the market instead of fixing it.
Either way, the conversation the SEC has started is both necessary and overdue. The challenge now is not to retreat from reform, but to refine it. Stronger consumer protections are possible. So is a healthy lending ecosystem. But marrying the two requires an approach as adaptive as the market it seeks to govern.
If the SEC can strike that balance, the 10% (or higher) cap will be remembered not as a blunt instrument, but as the turning point that made Philippine credit both safer and smarter. – Rappler.com
