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Latin America: The sucking sound of Brazilian interest rates

Brazil’s economy leads the world in high interest rates. It is a blessing for banks but a burden on the economy – draining resources away from both new investment and consumption. Will new credit platforms finally jolt the established banks into a competitive response where previous strategies have failed?

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Brazil’s sky-high interest rates have long been a source of amusement and bafflement for visitors who learn that credit cards charge (on average, in September, according to central bank figures) 475.2% a year, overdrafts 321.1% and unsecured personal loans 132.3%.

These exorbitant interest rates have also been a source of academic study, with many economists trying to break down the multiple, deep-rooted causes of the high-interest economy into their constituent parts. This is because Brazil’s interest rates are also a cause of economic harm, with the heavy debt-servicing burden on individuals sucking money out of an economy that would otherwise consume more goods and services. 

And investment? Imagine the rate of return required on a business project that is based upon the average non-earmarked corporate lending rate of 30%. However, Brazilian rates may have become an opportunity: fintechs are looking at the staggering annual interest rates and concluding that there are margins to be made by offering lower rates on credit. Brazil’s banks – long blessed with an environment of super-high net interest margins (NIMs) – have noted the beginning of the advance and are reacting.

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