Publication: El Salvador Financial Sector Assessment Program Development Module: Financial Infrastructure
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2016-11
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2016-11
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This note was prepared in the context of a World Bank Financial Sector Assessment Program (FSAP) mission in El Salvador in March 2016. Since the last FSAP, the national payments system (NPS) has consolidated and expanded. The real-time gross settlement (RTGS) systems owned and operated by the Banco Central de Reserva de El Salvador (BCR) is the backbone of the NPS and is widely subscribed by both banks and supervised non-bank financial institutions. In 2013, the BCR launched a service for government disbursements called Sistema de Pagos Masivos (SPM). ATM and POS terminal deployment in El Salvador is below the average for the Latin America and the Caribbean, but above the average for lower-middle income countries. Notwithstanding these positive developments, the payments system remains exposed to certain risks and presents areas of inefficiency that the BCR aims to address comprehensively and in stages through a revised national payment system strategy. The note contains technical analysis and detailed information underpinning the FSAP assessment’s findings and recommendations. Further information on the FSAP program can be found at www.worldbank.org/fsap.
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“World Bank. 2016. El Salvador Financial Sector Assessment Program Development Module: Financial Infrastructure. © World Bank. http://hdl.handle.net/10986/26280 License: CC BY 3.0 IGO.”
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Publication El Salvador Financial Sector Assessment Program Update(Washington, DC, 2010-11)Payment systems are a core part of all financial systems. The quality of payment systems determines the stability of the overall economy, the efficiency and reliability of financial intermediation, and the possibility for the private sector to innovate and provide new services to consumers. This technical note presents the results of the assessment of payments, remittances, and securities settlement processes in El Salvador, based on international standards and best practices. It includes several observations for the improvement of the National Payments System (NPS) in El Salvador. This note takes into account the peculiarities of the jurisdiction of El Salvador: namely, the relatively small size of the financial system and the dollarized nature of the economy. The central bank and other institutions are already planning appropriate actions on many of the issues discussed. In some cases, however, the team identified additional elements, which are discussed in this note.Publication El Salvador Financial Sector Assessment Program Update(Washington, DC, 2010-11)The capital markets in Salvador are small and relatively underdeveloped, and have played a very limited role in the economy. On average, institutional investors invest less than 10 percent of their total assets in capital market instruments. In 2009, there were only five new issuances of corporate bonds and three in the case of equity. Banks and pension funds are the main institutional investors. The current market architecture and the natural monopoly it grants to the exchange hamper market development and prevent the modernization of the regulatory framework. There is an urgent need to overhaul of the regulatory framework to promote sound market development in the short-to-medium term. The regulatory framework should guarantee a level playing field between bonds and bank deposits, which should be reflected in the investment guidelines for institutional investors. The exchange should reposition itself to become more competitive and strategic at the local and regional level. The investment funds law should be finally approved to broaden and diversify the investor base. The importance of this reform is paramount as the current reliance on just two main institutional investors (banks and pension funds), with investment limitations (35 percent each per issue), creates a major limitation for new issuances. In the medium -to long- run, it is recommended to explore gradually integrating the individual markets at the regional level. This paper is divided into following four parts: part one gives current market situation; part two gives regulatory and supervisory framework; part three gives recommendations; and part four is reference section.Publication El Salvador - Financial sector assessment(World Bank, 2010-11-01)Despite the global and domestic shocks of 2008-2009, the banking sector remains sound. Salvadoran banks were not directly exposed to the global financial crisis. However, the parent banks of several major Salvadoran banks were and directed subsidiaries to conserve risk capital. The higher risk aversion and recession in the United States, combined with uncertainty about the 2009 elections, led to a sharp economic downturn, and a decline in both credit demand and supply. Banks' nonperforming loans increased and profitability declined. Even so, capitalization remained high. Stress tests indicate that most banks would be able to withstand large deposit withdraws and severe deterioration in credit quality arising from large macroeconomic or sectoral shocks. However, credit concentration risks appear significant. Regulated non-bank financial institutions do not pose significant risks, but pension funds' poor profitability is a concern for the long-term. Regulated cooperative banks and insurance companies report healthy financial indicators. Brokerage houses have reduced drastically their fund management activities, which until recently posed systemic risks due to inadequate regulations and unsound commercial practices. Pension funds have grown considerably and now amount to 25 percent of total financial sector assets. However, investments are mostly in low-yielding public sector securities. To ensure a sound financial footing for the pension system, an in-depth actuarial analysis should evaluate pension reform costs and calculate replacement rates. The type of investments available to pension funds should be expanded progressively to increase diversification, improve returns and foster capital markets.Publication El Salvador Financial Sector Assessment Program Update(Washington, DC, 2010-11)Financial service provision has expanded since the 2004 financial sector assessment program (FSAP) update, but access to financial services can expand greatly through mobile banking. An estimated 47 percent of adults in El Salvador have deposit accounts at a regulated financial institution, similar to the Latin American average. Although a range of range of bank and non-bank institutions serve the micro and Small and Medium Enterprises (SME) finance market, significant financial services provision is occurring outside of the regulatory perimeter. Improvements in credit information systems, simplification of credit documentation processes, and a strengthened legal framework for factoring can help facilitate SMEs access to credit. Issues of financial transparency and consumer protection are of increasing importance to the Salvadoran authorities, although resources for enforcement are limited. Both public and private entities are engaging in educational activities to promote financial literacy have the potential to play an important role in curbing over indebtedness. However, the consumer defense agency (Defensoria al Consumidor) lacks sufficient resources for enforcement of consumer protection laws. This paper is divided into following six parts: first part gives overview of financial access and usage patterns; the second part gives information on funding and savings products commercialized; the third part gives market participants; fourth part is legal and regulatory impediments to credit; fifth part deals with supervisory and regulatory perimeter issues; and sixth part is transparency, consumer protection, and financial literacy.Publication El Salvador Financial Sector Assessment Program Development Module(World Bank, Washington, DC, 2016-11)This Technical Note was prepared in the context of a World Bank Financial Sector Assessment Program mission in the Republic of El Salvador in March 2016. Despite the challenging economic environment, El Salvador has made significant strides towards a more inclusive financial sector. However, El Salvador faces a number of challenges, including regulatory weaknesses and uncertainty, anti-competitive practices, and a fragile security situation that impacts investment and innovation. The country still presents low levels of access to and use of a range of financial services. The financial sector is diversified, but some challenges need to be overcome to increase competition and innovation. There seem to be no excessive legal barriers to entry for new banks and the framework allows for a diverse range of large and small deposit-taking entities. The microfinance sector is diverse and competitive and reforms are underway to strengthen regulation and supervision, but capacity is an issue. Also, the microfinance prudential regulation should be improved to be in line with international good practices and standards. Reforms are needed to spur the use of electronic accounts and transactions and to improve the draft rules for simplified accounts. Further progress could be made by allowing bank and nonbank financial institutions access to and use of telecommunications infrastructure on a non-discriminatory basis. An effective consumer protection legal, regulatory and supervisory framework is needed to ensure healthy financial inclusion. The Note contains technical analysis underpinning the FSAP findings and recommendations. Given the requested focus on digital finance and consumer protection, certain areas relevant to financial inclusion – notably small and medium enterprise finance, financial education, microfinance regulation and supervision– have been addressed in an abbreviated manner in this Technical Note. Although this Note incorporates some insights from the Technical Notes covering Financial Infrastructure, Non-Bank Savings and Credit Institutions (NBSCI) and Public Banks, not all related issues are incorporated in this Note, so the other Technical Notes should be read for a more comprehensive view of Salvadoran financial inclusion.
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