Interest ceilings vs. the freedom of contract-judicial interest rate policy in the Philippines

• Main Author: Medel, Edward B.
• Format: text
• Language: English
• Published: Animo Repository 2009
• Subjects: Interest rates—Philippines; Interest—Law and legislation—Philippines; Business
• Online Access: https://animorepository.dlsu.edu.ph/etd_masteral/6587; https://animorepository.dlsu.edu.ph/context/etd_masteral/article/12959/viewcontent/CDTG004512_P.pdf
• Institution: De La Salle University

The purpose of this study was to analyze our Judiciary's interest rate policy. For the longest time, money lenders possessed the freedom to set whatever interest rates they liked. Our legal framework has allowed this because studies have shown that a free market of interest rates promotes efficiency, better utilization of resources as well as creating more sources of capital for investments. These all changed, however, when our Supreme Court rendered its decision in Medel vs. Court of Appeals. Penned in 1998, it laid down the rule of law that interest rates mutually agreed upon can be shuck down if it is excessive or unconscionable. Both qualitative and quantitative research were used for this study. Supreme Court decisions involving interest rates were dissected. Economic and ethical considerations on the same subject were analyzed. Two high ranking banking officials and Central Monetary Board were interviewed on the matter. For the quantitative side, the general dispersion of the general weight of interest rates existing for the past years were tabulated and processed in order to form a reasonable conclusion. The results showed Medel v. Court of Appeals, ten years after its existence, has not affected the policy of the Monetary Board. Neither has it affected interest rate levels which matter to the economy. Essentially, the application of judicial pronouncements striking down unconscionable interest rates has only occurred in the few cases where the matter actually reaches the courts. Society is fortunate that this is so. Supreme Court decisions have failed to define the standard for unconscionable interest rates. In the end, no range is given as to what is unconscionable and in fact, allowable interest rates overlap each other to a wide degree. Parties to a loan are left clueless and innocent interest rates can be shuck down at will by the Supreme Court. This ruins the stability of the transactions between the parties, who in entering such, relied on the wisdom of the market oriented world rooted in the freedom to contract of parties. Apart from this, the judicial intervention by the Supreme Court encroaches on the wisdom of the Monetary Board. In issuing interest rate policies, the Monetary Board is exercising its powers and duties to create policies concerning money, banking and credit. It does this within the parameters of its mandated duties under the Constitution and under the law which has created it. On the other hand, by creating its own judicial interest rate policy, the Supreme Court is violating the fundamental rnle of sepai·ation of powers of the State. By doing this, it is committing an unconstitutional act. From an ethical standpoint, a market oriented interest rate policy remains more ethical and advantageous for the people than any governmentally regulated scheme. With this, the author has recommends that the Supreme Comt resolve this matter en bane, overturn the docti·ine in Medel v. CA, and retmn the status quo by respecting the market oriented policy of the Monetaiy Board which has existed since 1983.