Should the Philippines Cap Online Loan Interest Rates? What We Risk Overlooking

Filipino Guardian | Should the Philippines Cap Online Loan Interest Rates? What We Risk Overlooking

As digital lending becomes more embedded in everyday Filipino life, a familiar question is once again making the rounds: Should the government impose a cap on interest rates for online loans?

The Securities and Exchange Commission (SEC) has reopened consultations on this issue, inviting stakeholders to submit their views by November 14. The goal is clear. It is to protect borrowers from excessive interest charges. But while the intention is noble, the implications are far more complex than they appear.

Why Capping Rates Isn’t as Simple as It Sounds

On the surface, limiting interest rates seems like a win for consumers. For many Filipinos, especially those without access to banks, online lending apps are their only option. These platforms offer quick, convenient loans for emergencies, small business needs, or day-to-day expenses.

But interest rates aren’t just numbers—they’re a reflection of risk. Lenders charge more when borrowers have unstable income, no credit history, or live in areas where collection is difficult. If a fixed ceiling is enforced, lenders lose the flexibility to price loans based on risk. Many may simply stop lending to higher-risk borrowers.

This leads to credit rationing, where those who need credit the most, like freelancers, side-hustlers, and micro-entrepreneurs, are the first to be excluded.

Who Gets Left Behind?

The Philippines still faces a major financial inclusion gap. According to the World Bank, nearly half of Filipino adults remain unbanked. That includes a wide range of people: rural residents, gig workers, online sellers, and small business owners.

For these groups, online lending platforms have become essential. They serve those without pay slips, with seasonal income, or with informal businesses. They also support micro, small, and medium enterprises (MSMEs), which make up over 99% of businesses in the country.

If legal lenders are forced to focus only on low-risk borrowers in urban centers, these underserved groups could lose access to formal credit entirely. And when legal options disappear, informal—and often illegal—alternatives step in.

Kenya’s Experience: A Warning Sign

Kenya tried capping interest rates in 2016, hoping to make credit more affordable. But according to studies by the IMF and World Bank, the policy had unintended consequences. Lending to small businesses dropped, banks shifted to safer corporate clients, and illegal lending operations surged.

Borrowers turned to unregulated apps that charged hidden fees, violated privacy, and used aggressive collection tactics. Instead of protecting consumers, the cap exposed them to greater financial and personal risk.

The Consumer Protection Paradox

When legal lenders are squeezed by regulation, they often respond in ways that hurt borrowers. They may shorten loan terms, add upfront fees, or tighten eligibility. These changes can increase the real cost of borrowing or exclude people with unstable income.

Meanwhile, demand for credit doesn’t vanish — it shifts to the informal sector. In October 2025, the SEC flagged 19 illegal lending apps for operating without licenses and violating data privacy laws. The PAOCC received over 13,000 complaints in just two months, many involving harassment and threats. If legal credit becomes harder to access, these numbers could rise even more.

What Should Be Done Instead?

Rather than a blanket cap, policymakers should consider smarter, targeted reforms:

• Improve credit data systems so lenders can assess risk more accurately and offer fair rates to more borrowers.
• Incentivize ethical lenders through reduced compliance costs or access to liquidity support.
• Expand financial literacy programs to help borrowers understand loan terms and avoid predatory products.
• Crack down on illegal lending apps with stronger enforcement and public awareness campaigns.

Regulation Should Protect—But Also Include

The Philippines is at a crossroads. Quick fixes may sound good, but they risk long-term harm. If we truly want safe and affordable credit for all — especially for the unbanked, the self-employed, and small business owners — we need smart regulation, not blunt restrictions.

Protecting consumers shouldn’t mean cutting them off from the credit they need to survive and grow.