Ernesto Carrasco, general counsel for Grupo Financiero Ficohsa, talks to Michael Washburn about investing in Honduras’ SME sector and the impact of regulators and taxes on the industry
Your organisation works extensively with small-to-medium enterprises (SMEs). In what sectors and industries are you most active?
Each bank develops its own policy and categorisation for clients. In our case we can consider SME clients that are organised and have sales volume ranging between $100,000 and $1 million. Under this range I would say that most of our financing goes to third parties that provide services to infrastructure and energy developers.
How would you describe the economic climate for SMEs in Honduras? How far do you SME businesses have to go to become attractive investment targets?
I would say that the Honduran government has promulgated laws intended to facilitate the organisation of SMEs in Honduras, nonetheless it is also true that tax law imposes a challenge for SMEs. Therefore even if its organisation is relatively simple it struggles with attending tax matters, labor and others that are more complicated, such as security. But even with such struggles, SMEs continue to appear in banking portfolios as an interesting sector.
As an investment target, I can say that there are still important opportunities, for example in the construction sector (small realtors, small and medium hardware stores), which for sure will continue with the big housing demand in Honduras. Of course this has to be tagged along with public policies that would permit medium and low-income families to have the opportunity to buy houses.
Are regulators in Honduras perceived as having a pro-business attitude?
I would say that as part of a public policy, the Honduran government understands that local and foreign investment is key to continuing on growth path. Being the regulator is an important player in the banking industry, they have to pursue their role as regulators keeping in mind their main concern, which is the sanity of the Honduran banking system, and the protection of depositors’ interests in banks.
Has the perception changed markedly in recent years?
Regulators have changed over the course of time in many parts of the world, and no doubt that Honduran regulators had to go through changes also. But, again, their duty is maintaining their role as regulator and permitting us supervised institutions to carry out our businesses under the rule of the law and the best practices applied to a local market like ours. Notwithstanding my remark, it is also true that regulators do permit regulated entities to approach the bench and ask for a review of business opportunities and obtain, without any compromise from the regulator, their initial view, which of course it continues subject to their final decision in case approval is needed, or is officially reviewed as part of their normal supervision work.
If you could change or abolish one law or regulation, which would it be?
As a general rule, I would say that it is very important for Honduras to reform and simplify tax regulation. I would also introduce modern procedures that simplify the collateral foreclosure procedures. On a deeper level, I would continue enacting laws that would result in strong institutions (judicial system, DA’s office, etc.), that would constitute a guarantee of the rule of the law and give comfort to foreign and local investors in Honduras.
What is the impact of tax law on SMEs and what might changes to the present regime mean for them?
When you introduce certain products to a country and you have to pay import customs, which is a sales tax, and then you sell the product inside Honduras to the final consumer, the SME cannot get a tax credit from the government, and cannot take it against any other tax. Not because government does not want to pay it, but because in Honduras tax laws are very complex and have to be simplified in order for SMEs to receive the credits, to receive some extensions they need in the construction industry, for example, and in tourism.
There are many complexities in tax structure, and my personal belief is that this makes it difficult for SMEs. Not only SMEs, but big entrepreneurs here have to struggle with this issue. This is something that has been reviewed by the IMF and IADB and many others that come to Honduras to consult.
A project is underway, I hope its last version will help simplify our tax law. I can’t say how far we are from the point where they have to send it to the congress, but I know that work has begun.
Let’s talk about FICOHSA’s relationship with the legal industry. Which local law firms do you work with most?
Within the Central American region we have selected among others well known firms such as Aguilar Castillo Love in Honduras, Guatemala and Nicaragua, Aleman Cordero Galindo and Lee in Panama, Consortium inHonduras, Nicaragua, Guatemala, Palacios y Asociados in Guatemala, and LatamLex in Honduras and Nicaragua.
Which global law firms do you work with most?
Our most recent M&A experience has resulted in an extensive work with Gibson Dunn & Crutcher, especially with Jose Fernandez, one of their partners. Also we have worked with Hill Stern & Morley in our recent operations with our institutional shareholders.
What do you look for when it comes to choosing outside counsel? Do you have any special criteria?
We have a specific policy regarding the selection of professional service providers, but overall I would say that our criteria is based on networking and past experience.
Networking includes investment bankers, audit firms which provide names for well-known local counsels). We look at whatmajor expertise a firm has is in their local environment, how many lawyers they have, whether these lawyers have specific academic backgrounds needed in the financial business.
Do you have a preference for hourly or fixed rates?
We prefer fixed rates, but understand also that some projects have to be addressed in an hourly fashion.
Let’s look to the future. What course do you see Ficohsa’s Honduras operations taking in the next two years?
Recently Latin Finance awarded Ficohsa Honduras, bank of the y for ear Latin America and Honduras. No doubt this a great honor, but most of all is a great compromise to our clients; maintaining a standard of excellence that would permit Ficohsa to continue its rank as the most important bank in Honduras and as an important player in the Central American region. Having said this I could say for a fact that we will continue being an important leader and participant in projects within the region and implementing products that would satisfy our clients’ needs.
Grupo Financiero Ficohsa
Ernesto Carrasco, is the general counsel for Ficohsa Financial Group, which includes four banks in the Central American region, an insurance company, and a banking representative office in Florida, among others. His practice includes corporate, banking, insurance and trust law. He holds a law degree from the Universidad Nacional Autonoma de Honduras, a MBA from Monterrey Technological Institute and a LLM from Boston University.