Other countries may be dogged by recession, but José Darío Uribe, governor of the Central Bank of Colombia, says the country's financial sector is undergoing a transformation.
The Colombian economy has withstood the impact of the 2008 financial crisis well. Growth last year was small but positive, and the recovery registered in 2010 has been fast; it is expected that this year's gross domestic product (GDP) will increase at a rate of about 4.5%. This is remarkable in that the country had to absorb the effects of not only the global recession of the past two years but also a prolonged interruption of exports to Venezuela, its second most important trading partner.
A major factor for those positive results has been the strength shown by the banking system, now fully recovered from a serious mortgage crisis in the late 1990s. In the aftermath of that crisis, a number of prudential and supervisory reforms were introduced, and it is now clear that those reforms were entirely justified with respect to improving the practices of the financial sector. Within that framework of stronger supervision and prudential guidelines, credit growth last year was somewhat slower than in the past, but never went into negative figures. In spite of the slowdown in 2009, credit has grown on average 13.8% annually in the past five years (in real terms), mainly due to the accelerated growth of commercial and consumer loans.
Mortgage loans, which remained depressed for a long period after the 1990s crisis, have also experienced a significant comeback since October 2006, growing at an average real annual rate of 7.1%. And the expansion in the financial system also contributed to increasing funding for the government as bank portfolios invested in public debt instruments, an attractive alternative for financial intermediaries.
One positive consequence of the vigorous activity in the financial sector has been that the reductions in the benchmark interest rate made by the Banco de la República in 2009 were quickly and efficiently transmitted to the rest of the economy, enhancing the counter-cyclical role of monetary policy in the past two years. It is worth mentioning that these cuts in the benchmark interest rates were totally compatible with a path of price stability: the price index for consumers rose less than 3% in 2009 and 2010, and the long-term inflation target is 3% plus or minus one percentage point.
The economic X-factor
Moreover, the expansion of both commercial and consumer loan portfolios has been accompanied by two factors with the potential for promoting sound economic growth. First, there has been an explicit strategy to increase financial inclusion. The number of firms with access to the financial system has increased significantly in the past few years, from 66,000 in 2005 to more than 89,000 by 2010. The same trend is evident in the case of household debtors with consumer and mortgage loans, which grew by about 65% during the same period. It should be mentioned that not only has there been an increment in access to the financial system but also growth in the use of financial instruments both in urban and rural areas.
Second, the micro-credit trend has been gaining importance in the Colombian economy during the past two years. We consider that trend to be desirable both from a social perspective and in its potential to contribute to further economic growth. Even though micro-credit represents only 2.5% of the total outstanding loans in Colombia, it has a considerable social impact as more than 1 million people currently have loans that can be so described. The potential demand for micro-credit is vast and there is a lot of leeway for broadening the access to this type of lending operations in coming years, particularly in rural areas. To achieve this goal, Colombia's central bank has emphatically underlined the specific characteristics of micro-credit, promoting the development of a separate set of rules to suit such an operation.
Colombia's financial system expanded, but not at the expense of stronger and more technical regulatory and supervisory frameworks. The country has taken important steps towards a more risk-based and forward-looking approach to regulation in order to encourage adequate levels of capital and a more efficient distribution of financial resources. With respect to this, the Colombian market, credit and liquidity risk regulations have incorporated most of the guidelines provided by the Basel Committee. Furthermore, ours was one of the first countries in Latin America to implement a provisioning scheme based on expected losses and including a counter-cyclical component.
In line with international regulation standards, supervisory institutions have focused their efforts on monitoring credit institutions' liquidity conditions in order to ensure the proper functioning of the financial system's intermediation activities. Banking institutions must keep a reasonable amount of liquid assets available for potential liquidity difficulties. This has contributed to the stability and satisfactory functioning of the financial system in recent years, with the collateral effect of providing incentives that have been instrumental in the growth of the Colombian interbanking market.
In addition, the central bank has made significant efforts to promote macro-prudential tools and more sophisticated analysis as a means of correcting market imbalances and encouraging market discipline. Overall, there is a strong commitment to reducing the amplitude of financial cycles, and most regulations and policy decisions have been targeted towards achieving the goal of macro-stability. We can claim some partial success in this sense in that Colombia managed to sail through the last international financial upheaval mostly unscathed.
Nicely placed: Colombia's banks have survived the crisis in good health, but the central bank governor says they most do more to bring the poor into the financial system Nicely placed: Colombia's banks have survived the crisis in good health, but the central bank governor says they most do more to bring the poor into the financial system
Side effects
Of course, much remains to be done. One important field of action is to offer more and better banking services to a larger segment of the population, in particular to the poor. Colombia's level of bancarisation, though on a positive path, still lags that of developed countries, and we have not been able to reach the level of financial depth (measured as the ratio of loan portfolio to GDP) registered before the mortgage crisis of 1998-99. In this respect, efforts aimed at the development of micro-credit and the resurgence of mortgage loans are crucial for an accelerated economic growth.
Another item on the agenda for the coming years is to bring our financial intermediaries into a more competitive position. One could argue that a reduced sensitivity to external shocks has had a side effect on the development of our capital market and that it is time to analyse the removal of restrictions that can hamper financial innovation. With respect to this, the recent integration of the stock markets of Colombia, Peru and Chile will lead to new challenges and opportunities, affording portfolio managers and firms greater access to a deeper and more diversified market. Still, we must be prepared to tackle the new risks that will inevitably accompany cross-border integration and some of our future efforts will be oriented towards this goal.
José Darío Uribe is governor of the Central Bank of Colombia
