Bancarisation
Faith, hope but not charity

Latin America is currently benefiting from an initiative known as “bancarisation”. The aim is to widen access of individuals and SMEs to financial services – and one bank is leading the way.

It’s a fact that in a developed economy, total assets in the financial system will typically be equal to 100 per cent or more of a country’s Gross Domestic Product (GDP). In China, the figure is 65 per cent. In Latin America, a severely underbanked and underleveraged region, it’s just 32 per cent.

Individuals and SMEs in this region often operate in the black, or on a cash basis, to avoid the formalities of being “official” – including taxes. The effects of this are obviously hugely negative, limiting access to credit and growth opportunities.

This is where “bancarisation” comes in. Banco Santander, the largest banking franchise in Latin America, is pioneering this strategy, which simply means provision of banking services such as current accounts and credit cards and loans to those who have previously not been able to access them. It is rapidly having a significant effect on bringing new participants into the financial system.

Jose Juan Ruiz, Group Chief Economist, Santander Latin America, explains: “Once you have made the decision to invest in emerging markets, you quickly realise that the number of people engaged in the banking system is extremely low. Bancarisation is therefore vital to any bank’s strategy in these regions.”

The banking crisis of the 1980s and 1990s was devastating to financial intermediation in Latin America, and any commercial bank coming into the region since has been faced with rebuilding markets nearly from scratch. For example, in Mexico, the so-called “Tequila Crisis” of 1994, caused by the sudden devaluation of the Mexican peso, had a crippling effect. Ruiz states: “Previous to this crisis, the level of intermediation in Mexico was nearly 14 per cent of GDP and, in the year 2003, nearly 19 years on, intermediation was still around just 7 per cent of GDP.”

However, there is a big change happening in Latin America, with 75 per cent of the population now termed as “emerging middle classes” – those moving from poverty to the middle classes. “The last eight years have seen high growth and remarkable macroeconomic stability. Political and regulatory risk have been reduced. This has increased levels of bancarisation, with it almost doubling from 18 per cent in 2003 to 33 per cent now.”

Santander is uniquely placed to support this trend, with 5,908 branches in the region, more than any other bank. Branches are playing a vital role in bancarisation, helping to build trust with individuals and SMEs in particular.

“In some countries this strategy has worked better than others,” Ruiz continues. “Chile has a credit-to-GDP ration of around 73 per cent, Mexico has nearly 13 per cent. Argentina is still sitting at around 12 per cent.” Ruiz believes there are at least three forces at work. First, the economic cycle. Bancarisation is a procyclical activity, occurring mainly when economies are growing. Second, the better the macroeconomic policies, the lower the volatility of inflation and exchange rates, so the ability of the banking system to work on bancarisation is vastly improved. A secure financial framework is required to develop a long-term strategy like bancarisation. Finally, there needs to be in place the right legal framework, including security, protection for the rights of creditors, and a functioning judicial system.

“These three factors are largely being met across Latin America, but are developing in some countries faster than others,” he adds.

Santander is in an advanced stage in its Latin America strategy in general, with a leading presence as a top three in the region’s four largest markets. In line with its business model, Santander focuses on commercial and retailing banking, but is also active in project finance, corporate finance and global banking and markets. “One-third of our assets are in Latin America. Nearly half of our customers are here, and almost 70 per cent of our employees. We therefore need to establish as large a customer base as possible, with bancarisation playing a central role. When we first invested in Latin America, we had around eight million customers, and we now have 35 million.

“Our approach changes all the time. At first, we focused on attracting new customers, offering them current accounts, credit cards, and so on. We were aiming to become part of the financial and social structure. Now we have this customer base, we are moving towards selling more products to our existing customers.”

Besides the healthy expansion of the Latin American economies, bancarisation provides an additional, potentially huge source of growth. “Not to focus on bancarisation would be leaving money on the table and neglecting the future.”

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