BizCLIR

Costa Rica’s law of secured transactions is inadequate for meeting national and regional commercial credit needs. Although foreign investments in Costa Rican industry and commerce have increased significantly during the last three decades, these investments, as a rule, are financed from non-Costa Rican sources, usually at affordable rates of interest. In contrast, small and medium-sized Costa Rican businesses have to pay an interest rate of 25 percent to 30 percent per annum in their bank borrowings, according to interviews. If they were to borrow from nonbanks, these loans would usually command an even higher rate of interest.

The scarcity of commercial credit and its resulting high cost lead Costa Rican small and medium-sized businesses to finance themselves out of limited savings, thus hindering the economic development that reasonable rates of interest would have made possible. Therefore, unless Costa Rican small and medium-sized businesses can borrow at reasonable rates, such as is available to (among others) United States investors and exporters, Costa Rica will experience the same significant loss of small and medium-sized businesses suffered by Mexico after joining the North American Free Trade Agreement (NAFTA).

On the other hand, if Costa Rica were to modernize its secured lending law and unify it with that of its Central American neighbors, it would be able to act as an effective engine for its own development and for regional economic growth. Costa Rica’s history of political stability, democratic institutions, and relatively low level of judicial corruption continue to attract foreign investment in significant numbers. Its financial sector seems poised to interact with its counterparts in the other Central American republics and in North America as a lender, borrower, merchant banker, syndicator, and underwriter. Hence, with the help of legal modernization and harmonization with its regional counterparts, the Costa Rican financial institutions would qualify for assistance and cooperation by some of the largest secured lending institutions in the United States and Europe. These institutions have made it clear that they would be prepared to “open the credit valve to Costa Rica at reasonable rates of interest, provided it and its sister republics in Central America jointly upgrade and harmonize their secured lending and registry law in a manner consistent with the OAS Model Law.”