Ecuador: Money Transfers: The Best Niche in Ecuador

The second larger item in the Ecuadorian Budget after oil exportations is the amount received from immigrant people living abroad. These monies created an important niche of strategy: money transfer services rendered not only by banks but also by other smaller financial institutions in Ecuador which have correspondent agreements for transfers with similar companies located mainly in USA, Spain and Italy. To affirm above mentioned, in example, one of those companies has been growing more than 210% during a year and a half period in this activity.

Lack of local employment opportunities has pushed Ecuadorians to seek other means to have a salary and get sources of income for their families. Immigration has become the main source to find a job. While social reality has been affected, financial background of those families has been improved last years. Ecuador’s southern region has developed construction sector more than other regions has done and has increased demand of retailing banking services, for instance.

Money transfers are no-risk services and the cost-commission gives not only excellent profits for the institutions involved but also benefits for users. Banks and financial institutions are trying also to canalize this source to credits. It is expected a constant growth of this service during several years.

Development of financial and banking sector in Ecuador will be one of the main areas to promote external investments. Both public and private banks have to be more efficient under a dollar-economy scenario.

Ecuador lived a strong financial crisis in 1998 and 1999 when most of its 35 private banks were assumed by the State, nowadays there is only one bank which would be object of an offer for international investors: Banco del Pacifico. Pacifico was undertaken to an external international administration in order to increase its efficiency and recover due monies. During 2002 this bank received more than US $ 150 million from the State to avoid its liquidation. Pacifico bank was one of the largest private ones in Ecuador, now it has only two attractive "gold" assets: license of MasterCard® and a branch in Miami. With this background, it is difficult to think about an amount to purchase Pacifico but it might be a fact in two or three years, provided that its deposits grow more than currently 9% of total deposits of the system and credit card services grow more than currently 30% of this kind of market.

It is necessary to invite the presence of external banks in Ecuadorian financial system. Only this presence will contribute to have fairest competition in a small market. Only with this, clients will have better benefits. Ecuadorian banks have an average of interest rates of 18% for credits, so high for a dollar-economy, while inflation rate is 10%, for instance. Citibank and Lloyd’s are the only foreign branches which are still in Ecuador. While GNB (Panama) never arrived to create a real local business, dutch branches ABN-AMRO and ING closed their offices two years ago.

Other banks were and still are under AGD(Agency to Guarantee Deposits)-State control and will be used to pay clients deposits until their final payments by its liquidation. This task will last a couple of years more.

On the other hand, laws and regulations recently enacted allow establishment of new Pension Funds Private Companies which are expected to be one of the most developed areas for the next years. To establish one of these companies it is required US $ 1 million as minimum capital. A whole Social Security reform draft is still pending in the Congress. When pension funds begin operating the financial and securities market will be more attractive.

Public financial sector will also be reshaped in order to reduce high costs of its employees and to get competitive goals. If those are achieved it would be possible to promote social developing in construction or exportation activities, among others. Public financial sector has at least 6 financial and banking institutions for a reduced market. The new government might create a macro-development-bank which could have several financial products on the "same floor". To materialize this goal all financial services might be gathered in two groups: for individuals and for companies. Each division would have specialized departments for small or large business. This new financial public bank would cover housing, education, agriculture, exportation and public loans, instead of several inefficient public institutions which are used to "pay" political favors.

While several small private banks showed in 2003 excellent profits, public banks contributed with their financial losses to increase the black hole of the State budget.

If financial and banking sector gets dynamism and efficiency, external loans and credit facilities will be reopen to Ecuador. External investments will be needed to push up this scheme. Foreign investors will be required to inject fresh resources to create a better environment.

Economic authorities must work hard in order to increase the currently 45% of credits canalization (related to deposits) for clients and mainly under reasonable interest rates. Any economy sector can grow if interest rates are higher than profits. Production of goods and offering of services must have reasonable costs to operate and generate efficient competitiveness. It is necessary not only to invite foreign investors but also to require Ecuadorian banks bring their monies from abroad: US $ 1,000 million is calculated as an amount invested out of the country. If financial system gets liquidity other areas can be developed.