Volume 5, Number 11, Page 6
Congressional Highlights
compiled by Alfonso Trujillo from
Cámara de Diputados press releases
Environment — Reforms to the Mexican Environmental Protection & Ecological Equilibrium Law as well as the Forestry Law will be sought during the next ordinary period of sessions, according to the Ecology & Environment Commission. The reforms would include increasing sanctions for those responsible for fires in Mexico’s tropical region as well as environmental contamination in Mexico City, and decentralizing the Federal Environmental Protection Attorney’s Office (Profepa). Boletín 733, 5/15/98.
Commerce — Members of the Enterprise Subcommission called for expansive legislative reforms and increased promotion of Mexico’s Small Business Enterprise (SBE) sector, in order to address the financial, technological, and administrative capability needs of this sector. Possible reforms include reducing certain tax rates imposed on SBEs, based upon the size and age of the business and exempting SBEs from certain taxes during their first three years of existence. Boletín 730, 5/12/98.
Taxes — Mexico’s Tax System came under heavy criticism during a conference of the Treasury, Budgeting and Political Coordination Commissions and the International Affairs Committee with a parliamentary delegation from Finland. Tax reform proponents argue that numerous reforms to the current system, which provides only 15 percent of Mexico’s GDP, are needed to offer businesses improved legal security in the taxation process, reduce governmental discretion in tax matters, and reduce Mexico’s economic dependence on hydrocarbon resources. A proposal to create a Congressional Public Finance Office was also revealed, aimed towards the consideration and analysis of the Executive Branch’s economic initiatives. Boletín 729, 5/10/98.
The Mexican Banking Industry: More Troubles Ahead
This week the Mexican banking industry was rocked by the news of the arrest of many of its executives arising out of a U.S. investigation into money laundering. The arrests were the result of an undercover operation known as “Casablanca.” The Casablanca investigation is just the latest in a series of problems recently plaguing Mexican banks. The banks' troubles may not be over soon. The Supreme Court of Mexico is considering a case of great significance to Mexican banks which, depending on the outcome, could deal another blow to their stability.
The Mexican Supreme Court will soon decide the legality of the common banking practice of compounding interest charges. Since 1992, banks have been inserting a clause in consumer loan contracts that allows them to charge interest on interest payments. The matter is before the Supreme Court because federal courts in Mexico City and the state of Chihuahua have issued conflicting rulings. A federal court in Mexico City has upheld the legality of the practice, while the Chihuahua federal court has held that the practice is unlawful. The amount of money potentially affected by the decision is $48 billion pesos (about U.S. $6 billion). If the contract clause is held to be illegal and contrary to the Civil and Commercial Codes, the decision will become “jurisprudencia,” and therefore binding in all Mexican courts.
What does Mexican law say about compounding interest? The Civil Code states in Article 2397 that parties to a contract cannot agree to capitalize or compound interest charges. Any attempt to do so by contract nullifies the agreement. However, Article 363 of the Commercial Code states that unpaid accrued interest will not accrue interest, but that the parties may capitalize the accrued interest. The clause in question states that “The bank extends to the debtor an additional credit… which could be used each month on the date of payment of interest, exclusively in the necessary amounts to complete the payment of interest that cannot be paid with his monthly payment.” Javier Arrigunanga, general director of Fobaproa, the Mexican government's bank savings protection fund, stated that there are no legal principles forbidding the capitalization of interest. He also stated that banks and their relations with debtors are subject to the Commercial Code and that the Civil Code only applies to contracts between private parties.
Since the privatization of Mexico’s banks, the industry has faced many struggles. First, the banks were forced to restructure. Then in 1993 came Mexico's economic crisis. With the crisis, debtors suddenly found that they owed the banks double the amount of the debt because of skyrocketing interest rates. Mortgage interest rates went up to 95 percent. Many borrowers did not have money to pay the banks. The banks could not collect on the unsecured loans and ultimately decided to restructure the loans. If the Supreme Court decides that compounding interest is illegal, thousands of debtors could go to court to request the return of illegally collected interest. Such a development could lead to another major financial crisis in Mexico.
-Lic. Jose Felipe García
