El Salvador - Economy the Banking System

The banking system

Since 1980 the entire Salvadoran banking system has been owned and operated by the government. Under nationalization, the Central Reserve Bank, through the Operative Fund (Fondo Operativo), rationed foreign exchange to the commercial banks. The Central Reserve Bank assigned each commercial bank a maximum allowable balance of foreign exchange and required a weekly balance report. The Central Reserve Bank also covered foreign exchange deficits of the commercial banks but required that they transfer large surpluses to the Central Reserve Bank. In turn, these commercial banks agreed to disburse foreign exchange for imports on priorities set by the Central Reserve Bank in exchange for the services rendered. The highest priorities for foreign exchange disbursements included food, medical supplies, raw materials, and petroleum products, followed by intermediate goods, money for medical expenses and activities abroad, and debt servicing.

Prior to the nationalization of the banking sector, El Salvador had numerous private financial institutions that were called banks but that actually functioned like investment companies. Members, who had contracts with the companies, contributed funds on a regular basis and then used this capital as collateral. Some of the more important "banks" included the Investment and Savings Bank, the Credit and Savings Bank, the Commercial Farm Bank, and the Popular Credit Bank. The Popular Credit Bank had broader powers than the others and could accept time deposits and savings accounts, deal in foreign exchange, and extend letters of credit. The Salvadoran Coffee Company and the Salvadoran Cotton Cooperative also provided seasonal credit to their members. Their activities were not financed by deposits, but rather by loans from foreign banks (mostly United States institutions).

As a result of the civil conflict and the 1980 government decree nationalizing the banking system, many Salvadorans transferred their savings out of the country. Consequently, private savings fell from a 34 percent share of GDP in 1979 to a 32 percent share in 1980. Capital outflows, however, were heavier than this statistic would indicate because GDP fell by 8 percent in the same year. By 1982, nonetheless, private sector confidence in the banking system had been tentatively restored, and private savings increased to 39 percent of GDP. The increase was primarily attributed to a 1982 rise in interest rates, which provided an incentive for saving.

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