Oscar Samour Santillana of Consortium – Centro América Abogados analyses whether El Salvador's banking sector must diversify and make room for new players
The banking sector in El Salvador has undergone important changes since the beginning of the new millennium. With the creation of the Banking Law, effective since October 1999, the Salvadoran banking system adopted international tendencies regarding corporate governance, equity requirements, the creation of financial conglomerates, credit policies for related-party transactions and other international standards such as the Basel Convention. The intention of all the reforms was to make the Banking Law competitive, and bring it up to date with global banking requirements.
After these changes, which made the Salvadoran system similar to the rest of its Central American neighbours, large financial groups from the US, Canada, England and South America set their eyes on the region. This led to important acquisitions of financial institutions throughout the region, and in the case of El Salvador, represented the acquisition of most (if not all) private banks. This included: the sale of Banco Agrícola, the largest bank in El Salvador, to Bancolombia, which is one of Colombia´s most important banks; the sale of Banco Cuscatlán to Citibank, this being the acquisition that represented the highest economic value considering Banco Cuscatlán had operations in six countries and it coincided with the acquisition of Banco Uno, one of the leaders of the credit card market by the same group; and, Banco Salvadoreño, the oldest bank of El Salvador, was sold first to Banistmo of Panama and then to HSBC. A couple of years before, Scotiabank established a presence in several Central American jurisdictions and in a very important part of the Salvadoran banking industry through its acquisition of Banco de Comercio.
The conjuncture of several components – the international financial crisis, the focus on globalised economies, the interest of other financial groups closer to the Central American region, as well as the country's interest in developing new markets that shared a similar culture – brought about the entry of two other financial giants from Colombia into the Salvadoran market. At the end of 2010, Grupo Aval acquired the operations of the Banco de América Central. This was an important bank with a presence in the entire Central American region, with a considerable market share in El Salvador. It now operates as a multipurpose financial institution, but had its origins in the credit card business as issuers of Visa, MasterCard and American Express. Later, in January 2012, HSBC sold its operations in El Salvador, Honduras and Costa Rica to Grupo Financiero Bolívar, owner of Banco Davivienda and Seguros Bolívar in Colombia, both important players in the Colombian banking and insurance market. The two most important financial groups in the region from Guatemala made an incursion in the Salvadoran market, one of them with its own licence (Banco Industrial) and the other one through the acquisition of a small bank (Banco G&T Continetal). Both have been highly aggressive in taking up clients that are not of interest to global franchise banks, which has resulted in an important growth in the medium size business sector.
The presence of these financial groups modernised the management of banks by implementing international standards to their corporate governing policies and establishing 'first world' credit policies. These changes have resulted in the Salvadoran banking industry becoming one of the best-capitalised in the region, with better credit risk management, and a highly acceptable default rate with regards to international standards. However, at the same time, this modernisation brought about a certain disregard of important economic sectors, such as micro-credits, small businesses and the agricultural sector, which are vital segments of El Salvador's economy.
In response to this situation, in late September 2013 a group of Salvadoran businessmen announced the creation of a new bank called Banco Azul. The group is in the process of obtaining all the necessary authorisation from the banking regulator and is expected to initiate operations sometime in 2015. The shareholders of Banco Azul have stated that the bank will have a main focus on medium and small size companies. While some see this project as a great initiative by local businessmen that could set an example for investment opportunities in El Salvador, others are sceptical regarding the potential success of the new bank, as the banking industry is dominated by international giants. Nevertheless, as the Salvadoran regulator is insisting that banks create policies that allow the more popular sectors access to banking facilities, this new option focusing on small and medium size companies and individuals seems a promising prospect.
On a different note, the Salvadoran government, as a state policy, transformed the Banco Multisectorial de Inverisones (BMI), until recently a second floor bank, into a commercial bank to provide financial services to the informal sectors of the economy, thus boosting small and medium businesses. BMI is now called Banco de Desarrollo de El Salvador (BANDESAL) and its primary objective is to lever the growth of the economic sectors that are least favoured by the global franchise banking policies. BANDESAL has become an important competitor in this segment, offering competitive interest rates for the development of new projects.
There are 14 authorised banks operating in El Salvador. However, the Banking Law also authorises foreign banks to operate through representative offices (which allow foreign banks to promote and offer their services publicly, without capturing deposits locally) or branches, which have almost the same rights and obligations and are subject to the same regulations as local banks.
The banking regulator in El Salvador is recognised in Central America as one of the strictest in the region. The entity that regulates and supervises banks and financial institutions in El Salvador is the Superintendence of the Financial Systems (SSF). The SSF was created in the early 1990s in an effort to restructure, modernise and strengthen the financial system of El Salvador through the Central Reserve Bank. The SSF has tried to adopt international standards in regards to prudential regulation, including, of course, the rules of the Basel Committee.
Until 2011, regulatory activity was governed by the Organic Law on the Creation of the Superintendence of the Financial System. However, since August 2011, the new Financial System Supervision and Regulation Law (Ley de Supervisión y Regulación del Sistema Financiero) came into force, which incorporated pension and securities superintendencies under the umbrella of the SSF, changing the regulatory structure significantly.
The style of prudential regulation of the SSF is very strict, and it is performed through procedures called comprehensive audits, conducted by members of the SSF. The audit analyses the bank's management of its legal, operative and reputational risk, and especially, the credit risk and reserves kept for potential contingencies arising from credits.
Despite the number of authorised banks operating in El Salvador, the SSF and other Salvadoran authorities have always been open to new players entering the market, inviting foreign financial institutions to do business in El Salvador, either by the creation of a new bank or the registration of a branch or representative office.
Creation of a new bank and registration of a branch or representative office
The Banking Law establishes minimum requirements that must be met to create a local bank. The current minimum capital required to incorporate a bank is $16,300,000. This requirement is reviewed and amended by the SSF from time to time. The law requires the bank to have a minimum of 10 shareholders. Additionally, it requires that the members of the board of directors have ample experience in the banking sector. Shareholders must provide evidence that the funds used as incorporation capital come from legitimate activities. Furthermore, the law contains provisions aimed at regulating the management of the bank's operations, including risk assessment, credit and legal risk assessment, complying with money laundering regulations and corporate governance. The SSF is very strict in matters relating to the raising of public funds, obliging banks to have agencies and offices with special safety requirements, integrated computer systems and a security vault that is bullet and fireproof.
The Banking Law and SSF regulations for the incorporation of a bank in El Salvador establish several main requirements for financial institutions.
The bank must be organised and operate in the form of a stock corporation of fixed capital. Its capital must be divided into nominative shares, with no less than 10 shareholders. The shares must confer equal rights to its holders. However, the entity's bylaws and charter documents may establish various types of shares, ie, preferred shares with limited voting rights but with priority for the distribution of dividends. The shares must be registered at the Salvadoran Stock Exchange (Bolsa de Valores de El Salvador).
The laws also establish that the bank may use any name as long as it is not already in use by another bank and that it does not include the word 'national' or any other word that may suggest that it was created by, or is in any way related to the state. Shareholders owning more than 1% of the shares require authorisation from the SSF. Moreover, shareholders owning 10% or more of the shares or that have the ability to appoint board members by themselves or together with other shareholders, are obliged to submit their personal and financial information to the SSF on a yearly basis.
The bank must be administered by a board of directors, formed by at least three members and the same number of deputies. The law requires members of the board to have well recognised honourability and ample knowledge and experience in financial and administrative matters. The board's president or his deputy must be able to provide evidence of a minimum of five years' experience in managerial or superior administrative positions in financial or banking institutions.
Banks may be incorporated through a tender offer or public bid, using public means to call for the acquisition of shares. The SSF's express approval is required to do this. Once the public bid expires, the documentation on the following must be filed before the SSF:
A bank may also be incorporated without making public callings, provided that the shareholders have the minimum capital required by the law and that there is no need to raise public funds. The SSF may request additional information within 30 days after the request for authorisation has been filed. When the additional information has been submitted and the filing is complete, the SSF must issue its resolution, authorising or denying the request within 120 days. Once executed, the incorporation deed and bylaws must be submitted to the SSF to confirm that the terms and conditions in the documents are the same as the ones contemplated in the project submitted for initial approval and that the initial capital has been integrated according to the authorisation. The definitive authorisation must be issued by the Superintendent, otherwise the incorporation deed cannot be registered at the Registry of Commerce.
The authorisation to commence operations must be published in the Official Gazette and in two regular newspapers. The bank may commence operations immediately after this requirement has been met and verified by the SSF.
Should a foreign bank wish to open offices or branches in El Salvador, the Banking Law and the prudential regulation of the SSF establishes an additional set of requirements. These included that a foreign bank must obtain a preliminary authorisation from the SSF. This authorisation is issued for a period of two years. It can be extended and also suspended by the SSF if offices in El Salvador perform debit transactions or violate any provisions of the Banking Law.
Attached to the request for authorisation, the foreign bank must provide verification that the headquarters are legally established according to the laws of the country of incorporation, and are subject to prudential supervision according to the international standards, and that it has a top ranking from an internationally-known rating agency.
The foreign bank must also show that according to the laws of the country of origin and the company's statutes, it may open branches, agencies or offices that meet the requirements of the Banking Law, and that the initiating operations in El Salvador have been authorised by the government authority responsible for the supervision of the institution in the country of origin. The bank must have a pledge to retain permanently in El Salvador at least one representative with sufficient powers to perform all the acts and contracts that must be performed and take effect in El Salvador.
All foreign banks in El Salvador need a commitment to maintain the set amount of the capital and the capital reserves required by law. They need to provide the regulators with proof that the bank's headquarters have been operating successfully for at least five years, confirmed by reports from the supervising entity of the country of origin and an internationally-known rating agency.
A bank must agree to submits to the laws, courts and authorities of El Salvador, in relation to acts and contracts subscribed in the country or that take effect in the country. Incorporating an new office or branch after this process will require the bank to submit to the same set of steps as a bank without prior public call.
Before granting the corresponding authorisation, the SSF must subscribe cooperation agreements with the supervising entity of the country of origin of the bank's headquarters, in order to coordinate the supervision activities. The SSF has 90 days from the date of the filing, to grant the authorisation of incorporation and the authorisation to operate. This authorisation also includes registration at the Registry of Commerce of the incorporation deed and other incorporation documents of the institution, or certification of those documents. Foreign banks authorised to operate in El Salvador are subject to the same SSF inspections as Salvadorian banks, and unless otherwise provided by law, a foreign bank that operates in El Salvador has the same rights and privileges. Depositors and creditors domiciled in El Salvador will have preferential rights over the assets that a foreign institution has in the country.
Access to international financing
Local legislation has always been open to non-traditional forms of financing (meaning, from local authorised banks or branches). Moreover, certain incentives have been created to promote financing from foreign financial institutions to Salvadoran nationals.
The Tax Code, the Income Tax Law and regulations issued by the central bank, establish a reduction in the withholding tax applicable to interest payments made by Salvadoran nationals to foreign financial institutions that are registered with the central bank, as well as an exemption from VAT. The registration process is relatively simple, involving a written request filed along with certain legal and financial information. The registration is effective for three years and the entity will be required to provide certain administrative information on an annual basis to the central bank in order to maintain its registration.
The Salvadoran withholding tax rate on interest payments to entities not registered with the central bank is 20% or 25% if the jurisdiction of origin of the foreign institution is considered a low or zero taxation jurisdiction under the Tax Code. VAT also applies at the rate of 13%. Registration with the central bank reduces the applicable withholding tax to 10% and creates an exemption of 13% VAT.
In practice, many foreign financial institutions grant loans to local entities or individuals making use of these incentives. However, these institutions cannot actively market their offshore products as this would trigger licensing requirements with the SSF and sanctions may be imposed. All forms of advertising and mass communications are prohibited in El Salvador without proper authorisation from the SSF through a banking licence. However, clients may approach or contact the foreign bank directly.
First published by our sister publication IFLR magazine. Take your free trial today.
Oscar Samour Santillana
Consortium – Centro América Abogados
About the author
Oscar Samour is partner at Consortium Centro America Abogados in El Salvador. His main areas of practice are banking and finance, M&A, corporate, and ADR.
He obtained a Bachelor in Laws (LL.B) from Universidad Centromericana 'Jose Simeón Cañas' in El Salvador, with honours. He attended Pepperdine University School of Law, California, where he received his Masters in Law in dispute resolution as a Fulbright Scholar and has further postgraduate studies, including a degree from Columbia University School of Law, New York. After obtaining his LL.M, he worked as an interim lawyer at King & Spalding LLP in Washington DC.
He has led some of the largest transactions in the Central American region and is constantly sought for his extensive experience in advising on complex international operations and coordination of multijurisdictional legal teams. He has been recognised by various legal directories as a key individual in the region and speaks Spanish and English.