Peruvian economist Germán Alarco has proposed replacing the country's interest rate cap calculation with a cost-based formula rather than eliminating credit ceilings.
Speaking during a discussion organized by newspaper La República on an analysis by the Political and Social Economy Group (GEPS), Alarco urged keeping a ceiling based on financial institutions' real operating costs, credit risk, and a reasonable profit margin.
The debate comes as Peru's executive branch seeks legislative powers that include eliminating maximum interest rate ceilings currently established for specific credit operations.
Under the present scheme, the Central Reserve Bank of Peru (BCRP) sets maximum interest rates every six months based on average consumer credit rates multiplied by a fixed factor. For the period spanning May to October 2026, the annual ceiling stands at 114.13 percent for national currency loans and 99.84 percent for foreign currency loans.
Alarco, a professor at Universidad del Pacífico, criticized the technical grounding of the present method. He told La República that the existing maximum lacks technical justification because it simply equals double the average consumer credit rate.
Cost-Based Calculation Model
Under Alarco's alternative approach, regulators would calculate the true cost of granting a loan before establishing a maximum rate that allows financial institutions to earn a reasonable return.
The calculation would factor in average operating costs, capital costs, administrative expenses, credit risk, and a reasonable profit margin.
Alarco emphasized that credit risk varies significantly across market segments. A loan issued to a consumer with a stable income carries vastly different risk characteristics than credit extended to a borrower with a higher likelihood of default or a micro-enterprise unable to document income. A formula tied directly to costs would capture those structural differences more accurately.
By contrast, the current methodology relies on bi-annual updates. The BCRP announced that its next cap adjustment will take effect on November 1, 2026, based on average consumer credit rates observed between April and September.
Alarco stated that a new mechanism would not rely on an arbitrary percentage. Statistical data compiled by the Superintendency of Banking, Insurance and Pension Fund Administrators (SBS) would allow regulators to determine exact cost and risk components within financial institutions to establish a technically grounded limit.
Informal Credit and Financial Exclusion
The proposal to eliminate rate limits stems from a contrasting argument put forward by the SBS. The regulatory agency has argued that rate ceilings restrict financial access for higher-risk borrowers, particularly low-income individuals, pushing them toward informal lending markets.
Following the passage of Law No. 31143, SBS impact assessments reported borrower exclusion, reduced financial inclusion, and an expansion of informal loan channels. The agency contends that individuals excluded from the formal banking system end up paying higher interest rates while losing legal regulatory protections.
This dynamic highlights the primary policy dilemma, as an excessively low cap makes it difficult for financial institutions to serve riskier clients when maximum rates fail to offset potential default losses.
Alarco's model seeks to maintain regulatory ceilings while changing how they are determined, ensuring that credit risk is explicitly factored into allowable interest charges alongside operational expenses.
Consequently, the debate extends beyond merely keeping or removing a numerical cap, centering instead on which financial variables should determine borrowing costs without shutting vulnerable consumers out of formal credit.
International Comparisons and Intermediation Margins
Alarco also framed the discussion around international comparisons, arguing that evaluating interest rates requires looking beyond upper limits to examine the financial intermediation margin, which is the spread between what institutions charge on loans and what they pay on deposits.
When intermediation margins are wide, a larger share of the difference between lending and deposit rates flows into bank revenues. Conversely, narrower margins can lower borrowing costs for debtors while improving returns for depositors, provided operations remain profitable.
Alarco noted that Peru maintains high margins compared to regional peers, citing comparative data for Brazil, Chile, and Colombia. He told La República that Peru has the second highest financial intermediation margins in Latin America, noting that Chile operates with significantly lower spreads.
Comparable data from the International Monetary Fund (IMF) shows notable differences among regional financial systems, though indicators reflect unique market structures and methodologies. For Alarco, these comparisons highlight the importance of operational efficiency, asserting that a financial system must balance stability and solvency with cost structures that broaden credit access and reward savers.
Banking Profitability and Systemic Efficiency
Bank profitability also formed a key part of Alarco's analysis. He noted that Peruvian banking profits reached approximately 4.2 billion US dollars in 2025, representing a 37 percent increase from the previous year.
Alarco highlighted that Peru's banking sector recorded a return on equity (ROE) of 21.2 percent, compared to 11.8 percent in the United States. He stated that the profitability of Peru's banking system is nearly double international standards.
Official figures from the SBS show that annualized financial system profits reached 12,318 million soles as of March 2025, up from 9,052 million soles a year earlier and 10,331 million soles recorded prior to the pandemic. The regulatory body attributed this profit expansion primarily to reduced provision expenses and lower financial costs.
Alarco argued that narrowing the spread between lending and deposit rates would not eliminate banking profits. Instead, the goal should be establishing a level where institutions remain profitable while lowering borrowing costs and improving terms for savers.
While the executive branch favors removing interest rate caps entirely, the GEPS alternative retains regulatory limits while reshaping their technical foundation. Looking ahead to the BCRP cap revision scheduled for November 1, 2026, Alarco stressed that regulators must look beyond institutional stability to address the efficiency and depth of Peru's financial system.
