Maximum Legal Interest Rate in Panama: How Much a Lender May Charge.

Anyone lending money wants a return that reflects the risk. Anyone who needs it will sign almost anything. Panamanian law drew a line between those two positions, and it is worth knowing where it falls, because the court enforces it whether or not either side raises it.

On the legal quotations in this guide: Panamanian statutes are authoritative only in Spanish. The passages below are our own working translations, offered for comprehension. Where a case turns on precise wording, work from the Spanish text.

The ceiling between private parties: 2% a month

The governing rule sits in the Civil Code.

Article 1450. Agreed interest exceeding two percent (2%) per month shall be reduced by the court to that rate, even where the debtor does not plead the defense of usury. Usury may likewise be asserted as a cause of action. Neither a waiver of these rights before the contract takes effect, nor any stipulation that directly or indirectly disables the debtor from exercising them, shall have effect.

Three points that are easy to miss:

• The court cuts the rate on its own motion. The borrower need not plead usury; it is enough that the judge sees the rate on the page.
• A waiver signed up front is worthless. So is any arrangement designed to make the right harder to exercise.
• It also runs as a claim. The borrower need not wait to be sued before raising it.

One outdated figure that refuses to die

Ceilings of 7% a year for commercial obligations and 9% for civil ones are still quoted, figures attributed to article 2 of Law 4 of January 2, 1935. What matters is that the statute was repealed by article 285 of Decree Law 1 of July 8, 1999, as the official record of amendments shows and as the repealing text itself confirms by naming it.

The mistake survives because older judgments applying those ceilings to contracts signed before the repeal are still in circulation, and they read as though they stated current law. For any contract signed today, the reference is article 1450 of the Civil Code.

The ceiling captures every charge, not only the one labelled interest

This is what breaks most loan agreements. The first paragraph of article 1450 sweeps in any sum the lender is to receive over and above the principal, whatever it is called, whether interest, a penalty, compensation for loss, or anything else.

So a loan at 2% a month that also carries a collection handling fee, a late payment penalty or a monthly administration charge has already broken the ceiling, even though each item looks modest standing alone.

The same treatment applies where the borrower undertakes to repay more than was actually advanced: the second paragraph of the article treats the difference as interest.

Two items sit outside the calculation and may be agreed separately: the costs of collection and legal fees should enforcement become necessary. Law 52 of 1917 expressly allows both in negotiable instruments without the sum ceasing to be certain.

What a borrower who has overpaid may recover

Article 1450 does more than trim the rate going forward. A borrower who has already paid interest above the ceiling may recover the overpayment together with an equal amount on top. For a lender, overcharging risks paying out twice what was wrongly taken in.

The exemption that matters: banks

The 2% monthly ceiling does not bind banks. Article 79 of the consolidated text of the Banking Law, issued by Executive Decree 52 of April 30, 2008 over Decree Law 9 of 1998 as amended by Decree Law 2 of 2008, provides that banks set their lending and deposit rates freely, and that other laws imposing maximum rates do not reach them. The Full Bench of the Supreme Court ruled on that wording on June 11, 2014, in a judgment published in Official Gazette 27731-A of March 3, 2015. It is worth being precise about what it held: the phrase "other laws or rules establishing maximum interest rates shall not apply to them" was declared not unconstitutional. The ruling reached that exclusionary phrase, not the freedom to set rates, which had not been challenged. A further resolution of the same bench, on November 7, 2014, disposed of the applications for clarification and confirmed the decision.

The judgment should not be read as a blanket endorsement of the Banking Law: in the same decision the bench did strike down other provisions, among them the article on the banking regulation and supervision levy.

That is why a credit card or a bank facility may run well above 2% a month without offending article 1450. The Civil Code rule is aimed at lending between private parties and at lenders outside the banking system.

Where the parties agreed no rate at all

If the obligation is commercial and no rate was fixed, statutory interest fills the gap.

Article 223. Commercial debts that are liquidated and payable in cash shall bear interest. This provision does not permit a claim for compound interest, save by agreement to the contrary. Where no rate has been fixed by agreement, the statutory rate shall be understood to apply, being ten percent a year, until such time as another rate is set by law.

That ten percent is not 1916 drafting: it comes from article 8 of Law 43 of 1919, which replaced the closing paragraph of the article.

The compounding sentence repays close reading. The provision does not prohibit compound interest: it says the rule "does not permit a claim for" compound interest, save by agreement to the contrary. That is a rule against presumption, not a ban. The prohibition sits in civil law, in article 1447 of the Civil Code: "A stipulation of interest upon interest is of no effect." In commercial practice it means that rolling accrued interest into principal has to be bargained for in writing.

A point that is usually missing: usury is not a crime in Panama

Usury today is purely a civil matter. The Criminal Code in force, adopted by Law 14 of 2007, creates no offence of usury: the words do not appear anywhere in its articles, and the chapter on fraud does not reach lending at an excessive rate.

It did exist once. Article 192 of the 1982 Criminal Code punished with day-fines anyone lending above a monthly rate set by the National Banking Commission. It went with the wholesale repeal of that code, and by then it was already a dead letter: the body it referred to had been abolished in 1998, by the very reform that freed bank rates.

The practical consequence: a lender who charges above the ceiling commits no crime, but faces having the rate cut by the court on its own motion and repaying the excess twice over.

Drafting the clause

• One default charge, stated to be the only one.
• Wording confirming that no further fee, surcharge or penalty accrues on top of that rate.
• Costs and legal fees kept as a separate head.
• No waiver of the usury defense, since it will not hold.

Where the debt is also documented in a promissory note, it is worth reading how to draft one that keeps its enforcement power. A badly built interest clause invites an argument about the instrument itself at the precise moment you need to collect on it quickly.

Legal basis: Civil Code, articles 1450 (as amended by Law 7 of March 31, 1928) and 1447; Code of Commerce, article 223 (closing paragraph amended by article 8 of Law 43 of 1919); Law 52 of 1917, article 2; article 79 of the consolidated Banking Law (Executive Decree 52 of 2008). Statutory quotations are our own translations from the Spanish. Informative content, not legal advice.