Rapid Assessment of Potential Barriers to Cross-Border Financing in Central America
Overview
With negotiations recently completed for a Central American Free Trade Agreement (CAFTA) and with the U.S. entering negotiations for a free trade agreement with Panama, there has been increased interest by the private sector to invest in the region. Of note are companies that already operate in particular countries in the region but want to expand to others. This includes financial institutions as well as manufacturing companies. What is different now, as compared to the past, is that these companies have substantial ongoing operations that they would like to use to collateralize new operations in another country. In attempting to carry out such operations, many companies have run into a series of constraints that risk hindering cross-border investment and ultimately limit economic growth and job creation from these potentially large operations. In January 2004, USAID participated in a series of meetings in Guatemala, El Salvador, Honduras, Nicaragua and Panama during which it was determined that regional financial integration, including the inability to easily carry out cross-border financial transactions, was a key constraint to business development in the region. This included the need to harmonize financial regulations in such sectors as banking, insurance, and the issuance of stocks and bonds. Entities such as the Central American Bank for Economic Integration (CABEI) have programs in place to assist bank supervisors to develop a set of common regulations for the region, establish common accounting standards, etc., however, these are long-term programs that take time and USAID was interested in identifying what, if any, short term solutions might exist. Because removing constraints so that such projects can go forward has such potential for significant job creation and economic growth in the region, the Office of the AA/LAC, the Mission Directors from Honduras and Nicaragua, and G-CAP have all taken an active interest in resolving this dilemma. USAID/LAC specifically asked CARANA to develop a rapid evaluation of the real and perceived constraints to cross-border financing in Central America to further inform the dialogue between USAID and CABEI and identify a series of programs that may help to reduce potential business constraints. Counterparts
The primary counterparts for this activity were USAID/LAC and the Central American Bank for Economic Integration (CABEI). The following institutions were involved in the primary research efforts: | Asociación. Bancaria Salvadoreña | Asociación. Hondureña de Instituciones Bancarias | Asociación Bancaria de Guatemala | | Asociación de Bancos Privados | BAC | BAMER | | BANCENTRO | Banco Agrícola | Banco Central de Honduras | | Banco Cuscatlán | Banco Cuscatlán CR | Banco Cuscatlán Panabank | | Banco de Boston Panamá | Banco de Finanzas | Banco Futuro/Lafise | | Banco Improsa | Banco Industrial | Banco Uno | | Banex | Banistmo | Banpro | | BICSA Guatemala | Bladex | Bufete Lex Counsel | | Comisión Nacional de Bancos | Global Bank | HSBC Panamá | | Improsa Capital | INCONHSA | Lafise Bank | | Lafise El Salvador | Lafise Guatemala | SUGEF | | Superintendencia de Bancos | Superintendencia del Sist Fin | | Timeframe
This rapid evaluation was conducted in June and July 2004. Activities
CARANA reviewed the initial discussions and considerations raised and developed a scope of work for a rapid evaluation of the real or perceived constraints to cross-border financing in the region. CARANA consultant Rodrigo Zapata, an experience banker and investment promotion professional in the region, used the following framework to conduct the rapid evaluation: - Identified and obtained the principle laws and norms relevant in each country.
- Conducted a comparative analysis of cross-border laws and regulations in the region.
- Defined a series of potential cross-border financing scenarios.
- Created a telephone interview guide.
- Conducted a series of 38 interviews with key stakeholders and actors throughout the region.
- Provided USAID with a summary of each interview.
- Developed a series of general conclusions designed to inform USAID and CABEI on the current rules of the game in each country and across the region.
Results
CARANA Consultant Rodrigo Zapata effectively addressed the original questions raised by USAID and CABEI in their exploratory meetings on the subject. Through 38 interviews with key stakeholders and financial actors in Central America and Panama, Mr. Zapata uncovered the current practices associated with cross-border financing and potential impediments to these investment activities. CARANA delivered a final study that provided a comparative analysis of each country’s laws and regulations concerning cross-border financing, and presented the following principle conclusions: | | 1. | In general, it is possible for businesses in the region to obtain financing for business activities in other countries in Central America and Panama, with varying degrees of ease or difficulty depending on the country of origin and counterpart country, the size and visibility of the enterprise. | | | 2. | The rules of the game of each of the six countries differ significantly, from Panama on one extreme that functions as a financial center whose legislation and regulations are the most sophisticated in the region, to countries such as Honduras and Nicaragua, who prevent cross border financing either by law or by decree under the bank superintendencies. In the middle is El Salvador, where cross border financing is permitted with significant restrictions, and Costa Rica and Guatemala having the most liberal stance, not necessarily indicative of their respective legislation which requires significant assurances for financing of long term operations. | | | 3. | In general, there is high liquidity in the financial systems of the region and the allocation of cross-border loans is one exit valve of which banks are taking advantage to the extent permissible under the law. | | | 4. | A significant number of banks in the region have adopted a “regional” strategy. These banks offer a platform of services and technology that permits serving their clients in practically any country of the region. Some of them also have “offshore” banks that complete the offer package. There are 10 banks with different degrees of regional coverage:
a. Completely regional: Cuscatlán, Uno, BAC, Promérica, Lafise
b. Limited regional coverage: Istmo, Agrícola, Improsa, Pro-Credit, BICSA | | | 5. | In general, the larger and more known enterprises have more or less guaranteed access to cross-border credit with both local and regional banks. Furthermore, these individuals and companies have access to nonregional banks that are entering the region, such as Miami and Panama-based banks with international licenses that provide loans at very competitive fees. | | | 6. | The small and medium-sized enterprises have much more difficulty in obtaining cross-border financing and would be the greatest beneficiaries of a program of credit guarantees or CABEI loans for cross-border initiatives. | | | 7. | Despite the above, the perception is that the mixing bowl of diverse legislation and regulations found in the region, different in each country, is an element that adds “stress,” in terms of bureaucracy, cost, uncertainty and duplication of guarantees and transactions. | | | 8. | Many banks simply to not enter other countries because it is so complicated to know and understand the risks and requirements of each country. | | | 9. | The general opinion of the bankers and supervisors of the different countries is that the long-term solution is the establishment of clear rules, standard and simple, that function in a similar way across the region. This could be a task that takes some time, but in general the thinking is that this effort must be undertaken sooner rather than later. | | | 10. | In the short term, while tackling the above, it would be well-received if CABEI were able to make available a line of guarantees for enterprises seeking cross-border financing, as the World Bank did in Europe through MIGA in the 1980s. Another consideration is a line of credit available to support cross-border initiatives that attract investment and regional expansion. | | | 11. | Another idea that came out of the interviews would be to create a training and awareness program for supervisors, bankers, entrepreneurs, government employees, politicians, etc. on intra-regional financing, with the goal of eliminating attitudinal barriers and disconfidence in the current system. | Relevant Documents
Download this page in PDF format here.
E.14.14.3-2 CAFTA X Border Finance Final Report.pdf
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Project Activities 
