El Salvador banks face more complex lending environment

Salvadoran banks are being challenged to grow amid unfavorable economic and social conditions, while regulators face the difficult task of ensuring that the large participation of foreign banks remains a positive for the local banking sector.

These two key findings emerged from the recent study "Diagnosis of the Financial System" published by Salvadoran Foundation for Economic and Social Development (FUSADES).

The think tank's report stressed that the immediate economic, social and political environment facing El Salvador's banks had become more complex amid problems like slow economic growth, insecurity and deterioration of the fiscal situation.

The report also pointed to the country's March elections, noting election years tend to have greater financial sector uncertainty.

The FUSADES study showed that, since 2007, El Salvador has become the country with the largest participation of foreign banks, first multinationals such as Citi and HSBC and later Latin American groups.

According to FUSADES, international financial groups have always had an interest in Latin America due to the market potential: countries where the population is increasing, and where, in general, many do not have access to banking services.

"The country enjoyed macroeconomic stability in the years of the internationalization of banking, trade liberalization, mobility of capital flows, the use of the US dollar as legal tender, and was rated investment grade by Moody's; although, there were also difficulties such as insecurity and low economic growth."

FUSADES said there is a consensus among researchers that the penetration of foreign banks in a local market results in benefits such as the introduction of new products, more efficient management, and more competitiveness in the supply of credit, but there are also challenges.

"The challenges sometimes arise from the differences between the way parent companies manage and the regulations applicable to the [local] banks they acquire; among them the decisions of the parent company on a global scale, sometimes, benefit some subsidiaries and others do not."

In the Salvadoran case there was no increase in the supply of credit after the internationalization of the banking system, but this is also due to the fact that it coincided with the global economic crisis, with the report noting, "So that many global and regional banks were subjected to extraordinary tensions, followed by significant institutional and policy changes in many banking institutions as well as new financial regulation."

Much like the global economy, El Salvador's own economy shrank immediately after the crisis and access to lending declined significantly between December 2008 and December 2010.