Despite the demise of Soviet support, Cuba's banking sector has experienced a period of spectacular growth, reports Karina Robinson from the Caribbean island. By establishing competition and efficiency into the system the country is more than managing to ride the storm.
A 19th-century bishop based in Cuba reportedly wrote to his superiors in Europe: "Al Cubano le importa mas el alma de los negocios que el negocio del alma" - the soul of business matters more to the Cuban than the business of the soul. Whatever regime the population has laboured under, be it the Spaniards, the Americans or the current 43-year-old administration of president Fidel Castro, Cubans busy themselves with earning a living.
What the government calls "the special period", following the demise of the Soviet Union and its subsidies to Cuba, is allowing business and banking to flourish, albeit it still within the constraints of a heavily regulated communist system.
"There has been a spectacular transformation [in the Cuban banking system]," says Manuel Nu-ez, Caja Madrid's representative in Cuba and director general of Corporaci-n Financiera Habana (CFH), a joint venture between the Spanish savings bank and a Cuban bank.
A revolution begins
In the mid-1990s, Francisco Sober-n took over as head of the island's central bank, and along with technocratic vice-president and de facto prime minister Carlos Lage masterminded what could truly be called revolutionary changes in the banking sector.
From Banco Nacional de Cuba, which acted as both a central and a commercial bank, the BCC was created in 1997 as a central bank in charge of monetary policy and supervision of the financial sector. Banco Nacional continued to hold the state's historic unpaid foreign debt. Banco Popular de Ahorro, a savings bank, was allowed to become a universal bank. Banco Financiero Internacional's remit was expanded, as was that of Banco Internacional de Comercio. Banco Metropolitano, Banco Exterior de Cuba and Banco de CrŽdito y Comercio were established as commercial banks, along with 16 non-banking financial institutions in different sectors of the economy. Even an investment bank, Banco de Inversiones, was created and licenses for 16 foreign bank representative offices were issued. A holding company called Grupo Nueva Banca has majority stakes in a number of the Cuban banks.
Helped by various Organisation for Economic Co-operation and Development central banks, the restructuring of the system created competition, more efficiency through the introduction of debit cards and automated teller machines (ATMs, of which there are 100 in Havana), while individuals started to receive interest on deposits as well as permission to hold dollar accounts.
In 1995 there were no computers in Cuba's banking network. Now there are 13,000 and 80% of the banks are interconnected, while operations are done in real-time, says the BCC. However, the financial revolution is still in its adolescence and the authorities are keen to consolidate the changes rather than to move into more elaborate areas, such as stock markets.
"Our financial system was transformed to help the productive system. We will not win if the financial system goes way beyond the real economy," says Jorge Barrera, vice-president of the BCC.
The size of the banking system is difficult to calculate because the published figures are incomplete. However, the BCC admits to gross credits of $2bn in the system and $5bn in deposits, while some foreign bankers estimate the sector as a whole could be as large as $3bn. There are a number of reasons for the lack of clarity, among them the issue of relations with the US.
State of war
The government is still in a state of passive war with its neighbour. More than four decades of the 1961 US embargo have taken their toll on the economy and last month US president George W Bush insisted it would stay in place. So Mr Barrera can only laugh when asked the size and composition of the central bank's reserves. "They are in hard currency," is all he admits to, because officially they can not be in dollars.
In a bold move, this month the BCC is publishing for the first time M3, the monetary aggregate that will include dollars in the economy. It also hopes an experiment in which the euro will be accepted in the Varadero beach resort can be extended throughout the country, undermining the dollar's dominance.
Also, even though the Cuban government now allows residents to have US-dollar bank accounts, like the Argentines, many people distrust the authorities and keep their dollars secret. The government, itself, is only just beginning to realise that there is a need for transparency in financial accounts.
Billboards with a moustachioed Cuban guerrilla shouting at a cartoon Uncle Sam figure still abound, even though US tour groups can be spotted in picturesque old Havana with the excuse of being part of special cultural interest groups.
"The most difficult part of the embargo is not petroleum or grain - that has an effect on costs - but the lack of access to various technologies," says Mr Barrera.
In 1997, for example, when the Cubans started to install ATMs, they chose those made by French company Bull. They bought 80 before US company Diebold took over Bull's ATM division two years later. As a result of the takeover, replacement parts are now unavailable, let alone new machines. The result is increased costs to adapt the existing machines to work alongside new ones that are being bought from another non-US provider.
The US's 1996 Helms-Burton Act makes non-US companies wary of admitting they do business in Cuba. The Act means any company that profits from property confiscated by the Cuban government after the revolution can be sued in US courts. In addition, entry to the US can be denied to executives trafficking in such property.
If the Act is applied - so far, it has not been - a host of European and Latin American executives would be liable. As a result, most Havana-based foreign banks are hesitant to meet members of the press - they also are wary of making any comments that are critical of the Cuban government. Representative offices on the island include banks ING and Banco Sabadell.
Money to be made
Some foreign banks are already making money in Cuba and they believe the future might be even more profitable. "In five years, we lost less than $2000, while we have disbursed more than $500m," says Paul Nabavi, executive president of Carifin, a joint venture between the UK's CDC group and Cuba's Grupo Nueva Banca, which specialises in factoring, leasing, discounting of letters of credit and other operations.
"One of the good things is that this is a dollar market, so we do not have currency risks. There are no currency controls, unlike in other emerging markets. And the perception of risk is much greater than the actual risk. But you have to be selective about who you deal with," says Mr Nabavi.
CFH has a similar story to tell, with a return on equity of 18% in 2001. It is a joint venture between Caja Madrid, the Spanish savings bank, and Cuba's Banco Popular de Ahorro (BPA). CFH is a non-bank financial institution that is still quite small, with a $35m balance sheet, working mainly in the tourism and communications sectors. It has an astounding non-performing loan (NPL) ratio of 0%.
"The central bank is rigorous and exigent where credit risk and provisions are concerned. As a result, Cuban banks are sticklers in keeping to their obligations," says CFH's Mr Nu-ez.
What helps CDC and Caja Madrid is their presence on the ground and investment in the economy. Not only does this show commitment but, if necessary, they can make a fuss if facing slow payment or other problems. Certain other foreign banks - those "that come here hacerse la foto [to have their photo taken]" while doing no business and, in essence, waiting for Mr Castro's demise, a change in the regime and the lifting of the US embargo - may not do as well. Although currently foreign banks can not accept deposits, the central bank says it is legally possible.
"But not yet," argues Mr Barrera. "Cuban banks are very young and the foreign banks are very experienced. [As for bank joint ventures where deposit-taking was allowed], we would agree to it as long as the Cuban partner had a majority. Some foreign banks have expressed interest in this."
Joint ventures
A possible combination could be BPA and Caja Madrid because the latter has collaborated with the Cuban savings bank in technology and staff training. Other foreign banks could be interested once a joint venture is allowed because BPA has an unparalleled network of 5000 branches throughout the country, an average staff age of 39 years and is the main bank for paying out government pensions and receiving taxes.
BPA's 2000 net profits showed an eight-fold increase to 59.8m pesos ($2.3m). It does not disclose its dollar deposits, presumably not a large amount, and it seeks to make clients save more in pesos so it offers more favourable rates. Interestingly, though, clients with larger amounts on deposit do not receive a higher rate. Current accounts receive 1% interest, three-year fixed deposits receive 7%. Only 15% of deposits are long term.
Nor can the bank charge more for risky ventures because the BCC wants to cap interest rates and keep bad debts under control. BPA's NPL ratio is less than 1%. Raul Amado-Blanco, a member of the bank's senior management, says this is also due to the bank's history. Only recently was it allowed to lend to industry.
"Because we had no [historic] corporate clients, we could choose the good ones," he says from BPA's headquarters in a restored old mansion in the Miramar neighbourhood, where most foreign companies and joint ventures have offices.
The largest and most important bank in Cuba, according to foreign bankers, is Banco Financiero Internacional, which deals mainly with tourism, an industry that is responsible for up to 50% of GDP. However, it does not publish its figures, they say, unlike the second most important bank, Banco Internacional de Comercio SA (Bicsa), which has its accounts audited by Ernst & Young. Both banks work in dollars and are modern and creditworthy.
Bicsa has a balance sheet of $560m and net profits of $22m. It works mainly with foreign and Cuban corporates, as well as a few ministries, and is involved in fisheries, tobacco, citrus fruit, and the electricity and light industries. Its profits come from interest income and foreign exchange dealing.
To the suggestion that forex dealing does not sound very communist, Carlos L-pez, an executive vice-president at Bicsa, says: "Techniques do not have tags." JosŽ Lebredo, Bicsa's deputy chairman, says the bank is in a period of consolidation. "We are one of the oldest banks and yet we are only eight years old," he remarks.
Future challenges include opening up to two branches in each province. Currently, the bank only has a few in Havana and one in Santiago de Cuba, the second largest city. Also, it is working on improvements to an embryonic secondary paper market between the banks.
Banco Exterior de Cuba is an export-import bank. It was formed two years ago and is mainly staffed by former central bank functionaries. Last year, it financed $65m worth of business. It works with export credit agencies, such as Germany's Hermes. "Our loans to Cuban corporates are more expensive at 11% because we cannot use US banks or US markets," says the bank's president Jacobo Peison. He also insists that, even though it is a state bank, it will not finance a project that is deemed too risky. "We can say no to the state," he says.
On the economic front, one of Cuba's perennial problems is tight liquidity. This was not helped by flat growth in tourism in 2001 due to the slowdown in the world economy, Hurricane Michelle and the September 11 effect. Ironically though, Cuba fared better than some of its Caribbean neighbours because it is not as dependent on US tourists.
The BCC estimates GDP growth this year of 4%, which may be optimistic. In the words of a foreign investor: "The problem with Cuba is not the numbers but that everything is pre-planned." As a result, a number of projects have been cancelled and there have reportedly been some forced reschedulings with foreign banks that do not have a presence on the island. Also, the peso depreciated about 20% to 26 pesos per dollar.
Debt renegotiation
What also stymies growth is the overhang of about $12bn of debt which is being renegotiated. The BCC says it has held talks with the Paris Club of creditors in the past six months and is awaiting a response. It denies it needs a bad debt agency because less than 3% of debt in the system is non-performing. However, the de facto agency is Banco Nacional.
The sword of Damocles hanging over the reformed banking system is what happens when Mr Castro dies. Assuming the liberalisation of the system continues (and a change in ideology), the banks might have to adapt to an economy in which firms do not pay their debts, there is fraud and boom-and-bust economic cycles. In the post-communist history of banks worldwide, the first few years are the most difficult.
On the plus side, there is a big source of hard currency funds in Cuba, which a network could attract. Accounting is improving - there were no accountants seven years ago, say foreigners - as is everything to do with running banks.
An apocryphal story is told of the early days of the revolution. Mr Castro asked his advisers: "Who is an economist here?" "I am," said Che Guevara. He was then appointed to head the central bank. "Oh no!" he exclaimed. "I thought you were asking who was a Communist?!" Those days are far gone in Cuba.