Access to Finance in Chile and Latin America: Breaking Down Barriers

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Access to Finance in Chile and Latin America
Breaking Down Barriers
Jose Manuel Mena V. Chief Executive Officer
International Conference on Access to
Finance WSBI / World Bank Brussels, 28-29 October
2004
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• Access to banking services in Latin America
• Barriers / Restrictions on Access to Finance
• Current and Future Challenges Removing the
  Obstacles

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I. Access to Banking Services
Access to Financial Services Latin
America
WSBI, Sept. 2004.
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Financial Depth Indicators Latin
America
WSBI, Sept. 2004.
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Banking Development Level
Latin American Region ( of 2002 GDP)
Source Latin Finance, Latin Banking Guide
Directory 2003 (No. 149, August) and CEPAL.
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II. Restrictions on Access to Finance

• Economic
• Sociocultural
• Institutional
• Operational

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• Economic Barriers / Restrictions in Lat. Am.
• Low living standard and disposable income
• Poverty (2002)
• 44 of the population
• Low per capita income (2002)
• Annual average US 3,300 single country
  max. US 7,200 single country min. US 575
• High rate of unemployment (2002)
• 8.5 of labor force

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• Sociocultural factors
• Rural population, far from commercial centers
• Level of education (2000)
• 11.1 illiteracy single country max. 50,
• single country min. 2.4
• Financial illiteracy
• The population is generally unfamiliar with the
  financial system and the benefits of having
  access to it. On average, adult residents of
  Latin America access one banking product or
  fewer.

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• Institutional / Political Restrictions
• Target population of banks is mainly high-income
  sectors
• Little interest or incentive for providing
  banking services to low-income sectors
• Low transparency in non-banking financial service
  activities
• Scarcity and/or low quality of financial
  information on potential customers
• Complexity of products and services great
  variation between banks

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• Operational Obstacles
• High operating costs limit supply to lower-income
  sectors origination cost of consumer credit (US
  30, Chile), housing loans (US 300, Chile)
• Out-of-date technology hinders cost reductions
  and large-scale supply of products and services
  (credit scoring, central processing facility,
  database)

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III. Challenges to Increasing Access

• Orientations
• Greater access to banking services encourages
  economic growth, and vice versa
• Authorities can promote access and potentially
  induce it through
• Policies that favor stable and sustained economic
  growth
• Banking regulations that promote greater market
  competition and transparency
• Direct instruments

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• Introduce new technologies to reduce operating
  costs and prices of products and services
• Set as a goal the ability of the entire adult
  population, or at least the labor force, to
  access three basic products a savings product, a
  credit product, and a payment product

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• Direct Instruments
• Provide incentives for production and commercial
  activities to join formal sector.
• Promote competition through dissemination of
  information by regulatory authorities on prices
  and other conditions of products offered by banks
  and parafinancial institutions.
• Increase transparency of pricing by requiring
  disclosure to customer of total or final product
  costs (eg., total interest and commissions on a
  loan).
• Direct subsidies.

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• Direct focused subsidies
• Supply Subsidy to credit origination
• Microbusiness (US 85, Chile each first loans)
• Low-cost housing (up to US 17,000), to reduce
  fixed costs (US 175, average)
• Subsidy to loan demand
• Low and medium-cost housing (up to US 28,000
  upper limit of subsidy US 3,700)

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Direct Instruments (cont.)

• Standardize financial information required by
  banks for assessing creditworthiness and risk
  reduction (eg., uniform financial statements for
  SMBs)
• Broaden banking network in rural areas through
  creation of low operating cost units
• Design low-cost mass-market products for lower
  income sectors (commoditizing banking products)
• Encourage and induce payment of salaries,
  pensions and bills through banking system
• Conduct educational / financial alphabetization
  campaigns aimed especially at younger age groups

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• BancoEstado, Access to Banking Services
• Network the only bank in 152 of Chiles 342
  districts (branches and mobile access points).
• Micro and small businesses Full service to
  110,000 customers microbusiness, 252 thousand
  credits between 1996-2003.
• Mass-market products
• Market solution to needs and aspirations
  savings, 90 market share housing, 67
  insurance (ranks 2nd in bancassurance) payment
  instruments.

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• Appendix
• Access to Banking Services
• Chile and BancoEstado

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CHILE Rapid Expansion of Electronic Banking
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CHILE Banking Products Per Capita
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• BancoEstado Access to Banking Services
• General Information
• Personal and commercial banking services
• Total assets US 12,400,000,000
• Equity US 630,000,000
• Largest network of outlets in the country
• 368 branches and sales points
• Automated services 1,890 (5,000 including access
  through Redbanc ATMs)

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Some characteristics of BancoEstado

• Competitive large businesses, infrastructure
  projects, personal banking
• Profitable (2000-03) BancoEstado All
  Banks
• Before-tax profit 17.7
  17.3
• Capital
• Annual tax profit payments approx. US 100
  million
• Solvent Best credit rating in Latin America
  according to rating agencies (SP, Moodys)

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• Presence in the country
• One out of two Chileans has a savings account
  with BancoEstado
• Two out of three families who have a mortgage are
  BancoEstado customers
• In about half of the countrys districts we are
  the only bank

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Access to Personal Banking Services
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Access to Banking Focused on Medium and Low
Income Sectors
Market penetration of BancoEstado by
socioeconomic segment
Monthly family income (US)
70-90
Sample study, Metropolitan Region (Santiago),
July 2004.
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BancoEstado Medium and Low Income Sector Share
by Product
65.3
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Expansion of insurance
2440
1812
1344