VIII. TRADE AND PROJECT FINANCING - Banking System The state financial system consists of the Monetary Board (Junta Monetaria) which supervises government monetary, financial, and exchange policies; the autonomous Central Bank (BCE) which issues currency and sets interest and exchange rates; the Bank of the State (BEDE) which finances manages public sector project financing; the National Development Bank (BNF) which provides agricultural credit; the Ecuadorian Housing Bank (BEV); and the National Finance Corporation (CFN) which finances private sector development projects. The Superintendency of Banks (SB) regulates private banking, financial and insurance firms. The Superintendency of Companies regulates and reviews the financial status of private corporations and implements decisions of the National Securities Council regarding capital markets. The government has proposed a new Monetary Regime Law that will institutionalize current administrative policies that allow market forces to set interest and exchange rates. Due to the former policy of providing Central Bank credit to private banks at negative real interest rates, there was a proliferation of banks during the 1970's and 1980's. There are currently 32 private banks operating in Ecuador with combined assets of USD 5,324 million as of the end of 1993, a considerable number relative to the size of the economy. The three largest banks by assets plus contingents are Filanbanco (USD 770 million), Banco del Pacifico (USD 675 million), and Banco de Pichincha (USD 608 million). There are also some 64 finance, leasing, brokerage, and factoring companies (many of which are bank subsidiaries) with assets of USD 741 million, plus numerous savings cooperatives and foreign exchange brokers. Most banks and finance institutions are tied to particular family-controlled business groups which have been reluctant to give up control through mergers. Large interest rate spreads (averaging 16 points for 90 terms during 1993) and aggressive cost-cutting have allowed banks to continue to be profitable. The Financial Institutions Law enacted in May 1994 creates a deregulated universal banking system in which institutions can engage in a wide variety of financial service activities. Financial societies may engage in the same operations as banks, except for taking demand and savings deposits and making loans on current accounts, but may invest in non-financial enterprises. By breaking down the barriers between different types of financial institutions, the law should facilitate mergers. Banks may engage in transactions in any currency. With banks free to offer new services, including checking account interest, the banking sector should become more competitive. The law also institutes full consolidated financial disclosure requirements and requires early intervention by an upgraded Superintendency of Banks in the event of solvency problems. New banks are required to have a capital stock (technical equity) of about USD 6 million (existing banks must meet this requirement by 2002). Banks must maintain a 9 percent ratio technical equity to weighted assets plus contingents. As of August 1994, the reserve requirement will be unified at 12 percent for all deposits. There is no deposit insurance, but small depositors become senior creditors in the event of liquidation. - Foreign Exchange Controls Foreign currency is readily available on the free market and there are no restrictions on the movement of foreign currencies into or out of Ecuador. Private sector exporters are no longer required to surrender foreign exchange to the Central Bank and Ecuador enjoys a floating market in foreign exchange for all private sector transactions. Until late 1992 there was a dual exchange rate policy under which private and public sector trade was conducted at the Central Bank's intervention rate, while tourism receipts and capital flows used the free market rate. Public sector exchange transactions, such those resulting from exports by the state oil company, are still handled by the Central Bank, which applied a spread averaging 16.6 percent in 1993. The resulting resource transfer subsidizes operations of the Central Bank and extracts savings from the parastatal enterprises. The Ecuadorian government intends to reduce the spread to 7.5 percent in 1994 and 2 percent in 1995. The Central Bank devalued its fixed intervention rate by 35 percent in September 1992 and abandoned it entirely 12 months later, linking the official selling rate directly to the free market rate. The Central Bank has managed the sucre's sinking float against the dollar through occasional interventions in the market to prevent large fluctuations in either direction that would fuel inflation or hurt export competitiveness. During the course of 1993, the nominal depreciation of the sucre (i.e., the increase in the dollar's sucre value) was only 10.7 percent, one third the domestic rate of inflation. As a result, the sucre appreciated in real (adjusted for both Ecuadorian and U.S. inflation) terms by 16.7 percent against the dollar. The sucre only depreciated by 6.5 percent during the first half of 1994, reaching 2,180 sucres per dollar in June. The relative stability of the nominal exchange rate was in large part due to short-term capital inflows to take advantage of high nominal interest rates, with foreign lending to the private sector in 1993 running USD 245 million above 1992 levels. - Financing Availability Financing is a key ingredient in selling to the government and to the private sector. Since November 1992, all private sector imports into Ecuador have involved foreign exchange purchases on the free market. Typical terms of sale are confirmed letters of credit. Sixty percent of the letters of credit opened are at 90 days sight; the rest are at sight. Local banks offer sucre financing, albeit at spreads that averaged 16 points above CD rates for 90 day terms during 1993. Dollar financing is also available locally via "off-shore" units of Ecuadorian banks. Commercial banks also serve as primary outlets for financing backed by government institutions. In particular, the CFN offers long term financing via private banks for industrial and export development. Since the passage of the Capital Markets Law in May 1993, the Quito and Guayaquil stock markets have been developing into forums through which capital can be raised by offering corporate paper and equity shares to the public. The U.S. Export-Import Bank currently offers loan guarantees and direct medium-term (5 to 7 years) financing of U.S. exports to the Ecuadorian private sector and provides short-term trade credits for public sector purchases. Under a 1984 agreement, the Overseas Private Investment Corporation (OPIC) offers investment risk insurance and limited financing for projects with U.S. equity. Trade and project financing is also available through the Andean Financial Corporation (CAF), albeit at rates higher than those offered by Exim Bank. With the approval of the IMF program in May 1994, the World Bank and Interamerican Development Bank are moving forward with a number of multimillion dollar sectoral loans. The International Bank for Reconstruction and Development (IBRD), Inter-American Development Bank (IDB) and the Andean Development Corporation (CAF) are all active in Venezuela. For information on multilateral bank related business opportunities, please contact: Office of Multilateral Development Banks U.S. & Foreign Commercial Service U.S. Department of Commerce, Room H-1107 Washington, DC. 20230 Tel: (202) 482-3399 Fax: (202) 273-0927 The IBRD, a member of the World Bank group makes long-term loans at market-related rates primarily to developing countries. Loans are extended to promote broadly based economic growth and frequently focus on structural adjustment, sectoral reform and individual project lending. Typically, the World Bank does not finance the entire cost of a project, but instead covers components of a project purchased with foreign exchange, which on average is about 40 percent of the total project cost. Each project may cover a wide variety of sectors and can involve anywhere from one to hundreds of separate contracts providing export business opportunities for suppliers worldwide. For further information on IBRD business opportunities please contact: U.S. Department of Commerce Liaison Office of the U.S. Executive Director International Bank for Reconstruction and Development 1818 H Street, NW, Room D-13004 Washington, DC. 20433 Tel: (202) 458-0118 Fax: (202) 477-2967 The Inter-American Development Bank (IDB) provides funding to primarily public sector entities for the design and execution of projects. IDB projects afford U.S. suppliers of goods and services significant export opportunities, mainly in the transportation, environment, health, education, urban development, tourism, agriculture, and energy sectors. U.S. firms seeking information on IDB-financed commercial opportunities should contact: U.S. Department of Commerce Liaison Officer Office of the U.S. Executive Director Inter-American Development Bank 1250 H Street, NW, 10th Floor Washington, DC. 20005 Tel: (202) 942-8265 Fax: (202) 942-8275 - Correspondents with U.S. Banks Most Ecuadorian banks maintain correspondent relationships with U.S. banks. Among the major Ecuadorian banks engaging in international business are Banco de Pacifico, Filanbanco, Banco del Progreso and Banco Continental based in Guayaquil and Quito-based Banco de Pichincha and Banco Popular. In addition, Citibank, Lloyd's Bank, and Holland Union Bank (BHU) operate branch offices in Ecuador. Several Ecuadorian banks, including Pacifico, Pichincha, and Popular, have subsidiaries or agencies in the United States, while others, such as Filanbanco and Continental, share common Ecuadorian ownership with banks in located in the United States.