Against a background of state interventions and bad publicity, it is hardly surprising that Nicaragua’s banking system remains fragile.
Rough times began in 1979, when the communist Sandinista National Liberation Front (Frente Sandinista de Liberación Nacional, FSLN) government wrested control from Anastasio Somoza, a notorious dictator. The economy lurched to the left. The banking system, which was relatively solid before the revolution took hold, was nationalised at once. Local banks fell under state hands. Foreign banks were allowed to stay on, but could no longer accept local deposits.
“Official management of the financial system was highly centralised. There was no oversight, no bank superintendent,” says Mario Alonso, Nicaragua’s current Central Bank president, from his office in Managua, the country’s tropical capital and financial centre.
The Nicaraguan economy weakened steadily from 1984 to 1990. The need to fund the war against the US-backed, anti-Sandinista Contra (counter-revolutionaries) insurgency, a trade embargo with the US, natural disasters and little outside aid took their toll. Monetary policy in the late 1980s also proved disastrous, as then-president Daniel Ortega resorted to printing large amounts of paper money to cover military spending at a time of plummeting revenues. The move sparked hyperinflation, with the annual rate reaching 14,000% in 1988.
Back to basics
In 1990, when Mr Ortega stepped down and power transferred to the pro-market Violeta Barrios de Chamorro government, the optimism was palpable. Her economic policies largely succeeded in restoring the value of the córdoba, the local currency, and taming inflation (it fell to a single digit rate in a short time).
The financial system was de-nationalised in 1991 and several private banks renewed operations. Although the new system was virtually bankrupt and relied on start-up loans from the Inter-American Development Bank (IDB), local bankers were hopeful.
The new financial players were mostly Nicaraguans who had studied and worked abroad during the 1980s and early 1990s. Most lived in Miami and had cut their teeth at international banks there.
“When I came back in 1996 it was clear how much work was ahead of us. But we were confident. We had gained top-notch experience abroad and were ready to rebuild the system,” says Carlos Briceńo, general manager at Banco de Crédito Centroamericano (Bancentro), the country’s second-largest bank.
“Banks clearly had an important role in putting the post-revolution economy back on its feet. They facilitated investment, long-term loans and basically kept the economy’s motor running.”
An official banking superintendency was also created in 1991, to supervise financial activities. However, with only $3m of capital required to establish a bank in the country, a market glut ensued. Growth in the sector was rapid and largely uncontrolled. Eleven banks were formed between 1991 and 1996. In 2000-01 an inevitable shakeout eliminated a half-dozen banks.
“The market was still small, so you had a lack of liquidity. There were fraudulent practices. The state had to intervene,” explains Alfonso Llanes, Nicaragua’s acting bank superintendent (and former finance minister).
Government oversight
The bank bailouts soured confidence in the financial system and have since motivated officials to ratchet up regulation. “Our supervision has improved. Before, we’d only look at the credit portfolio. Now, we review balance sheets, the composition of deposits, whether or not a bank has the provisions to cover its obligations,” says Mr Llanes.
But there is room for more change. Legislators are currently reviewing a proposal that brings the sector more in line with the Basel Core Principles. “It includes some of the basic measures we still need to develop the market,” says Mr Llanes.
“I hope that we can implement it by early next year. We need the legal support to allow us to engage in better enforcement, to make tough decisions. The courts are very politicised here. Decisions can be left up to a judge who is manipulated by politics.”
There is reason to believe that the Nicaraguan financial system will continue to strengthen. The handful of banks still standing – namely Banco de la Producción (Banpro), Bancentro and Banco de America Central – have turned a corner. All can boast significant increases in their total assets over the past two years. Deposit rates are also up. Electronic banking services have surfaced. The bad-loan rate hovers at about 3%.
Retail options
Still, the range of financial services offered in Nicaragua remains limited. For the most part, banks offer accounts for overseas dollar transactions, offer certificates of deposit, credit and debit cards and personal safe-deposit boxes. Accounts can be held in córdobas, euros or dollars (more than 65% of all accounts are held in the latter). As far as corporate services, most financial institutions tend to serve only well-established industrial, retail and agricultural enterprises.
Bankers expect a wider range of products to come around eventually, thank to alliances struck with other Central American banks. “These partnerships will allow us to expand our operations, offer new products and become more competitive,” says Mr Briceńo.
The mortgage business will likely be one highlight in the coming years, as the push is on to close the housing gap in Nicaragua. The IDB reports that between 300,000 and 500,000 middle-income homes are still needed in the country, and the government says that the construction of low-cost homes is a priority.
Although long-term lending remains scarce in Nicaragua, as it does throughout Central America, Banco de Finanzas and Bancentro are leading the movement to offer mortgages. “We go through very conservative checks and are finding that, once approved, the loans are proving a successful new part of our business. We’re now seeing the possibility of offering mortgages at 20-year terms. This was not seen before,” says Mr Briceńo.
Small client base
Nevertheless, banks will largely remain off-limits to most Nicaraguans for some time. Many lack credit history or live from week-to-week, unable to save enough to consider investment options. To many, informal credit systems represent an economic lifeline. They mostly involve local mom-and-pops keeping hand-written registries of the small lines of credit they have offered their customers so that they can buy basics such as food and clothing (payment is typically 15 days after the credit is issues and the rate of non-payment is low).
Bringing more Nicaraguans into the system will only come with significant economic growth. This may not be easy in this country of hard knocks. When it is not suffering political upheaval and uncertainty, it is being knocked about by natural disasters, from hurricanes and droughts to earthquakes.
In 1998 Nicaragua took a major hit when Hurricane Mitch ripped through the country, killing at least 3000 people and leaving about one million homeless. Large swathes of the country’s infrastructure were destroyed, including major roads and bridges.
Nicaraguan coffee fields, the country’s most important crop and its main export, were also severely damaged. Many coffee growers have yet to fully recover as international prices remain at rock-bottom levels.
The struggling economy and the small size of the banking sector – total assets for the sector came to about $2.1bn in September 2003 – have kept foreign players from launching commercial operations in Nicaragua. The level of savings in Nicaragua remains limited (gross domestic product per head is about $470). There is only one leasing firm and five insurance companies (the state maintained a monopoly on insurance until1996).
Mutual funds are permitted but none have surfaced. “We’re still green compared with other markets in the region,” says Mr Alonso.
Volatile politics
Politics also keep investors at bay. Although Nicaragua is less threatening than it was during the Sandinista years, government stability is still not guaranteed. Since taking office in Janaury 2002, President Enrique Bolańos, jailed by the Sandinistas during the 1980s, has yet to take firm control of the legislature – let alone of his own party, the conservative Constitutional Liberal Party (Partido Liberal Constitucionalista, PLC).
Instead, former President Arnoldo Alemán (1997-2002) has kept a tighter reign over the PLC. Even last November, when Mr Alemán was removed as head of Congress and placed under house arrest for corruption charges, he still managed to conduct high-level meetings with legislators and influence the PLC’s political direction.
It was unclear how long Alemán would be under house arrest, and this question mark added a degree of instability to Nicaraguan politics. However, Mr Bolańos received a break on December 7 when Mr Alemán was finally sentenced to 20 years in prison on money laundering, electoral violations and other charges
Still, there is a movement in Congress to reverse the verdict and grant the ex-president amnesty.
Local analysts say that if the conviction does not stick it would demonstrate an outright abuse of the judicial system and could further scar Nicaragua’s image abroad. Already, the country is perceived as one of the most corrupt in Latin America.
It helps that Nicaragua has joined its regional counterparts in seeking new trade markets and forging free-trade agreements. Nicaragua is actively involved in negotiations with the US, along with its neighbours, Costa Rica, El Salvador, Guatemala and Honduras, to seal a Central American Free-Trade Agreement (CAFTA).
The treaty, which negotiators hope to send to the US Congress for approval in early 2004, would allow tariff-free access for a range of products. “We’re working with superintendents in other Central American countries to reach a consensus on norms. I think that CAFTA could increase confidence in the financial system overall in the region,” says Mr Llanes.
Debt relief
Nicaragua also gained some breathing room this January, when the IMF joined the World Bank in forgiving a large chunk of the country’s debts. The two agreements slashed more than $4bn from what had been a $6.5bn debt load, moves provided under the Fund’s Highly Indebted Poor Countries initiative. Perhaps, bankers say, these steps will convince international financial heavyweights to change their view of the country and invest.
“When we went to Washington at the start of the Bolańos administration, the IMF folks there said that the problem with Nicaragua wasn’t that it had a bad track record – it was that it had the worst track record in Latin America,” says Mr Alonso.
“But Nicaragua is undersold. There is a lot of potential here. We’re meeting our IMF obligations. Our government has a plan for development. Tourism is picking up. The outside perception is worse than the reality.”
