Interview: Walter Bayly
Banking penetration in Peru is among the region’s lowest. What are the issues and opportunities?
WALTER BAYLY: The economically active population in urban centres is roughly 11m people, of which only about 6m are clients of the financial system. That leaves around 5m Peruvians earning over the minimum wage but without access to the formal financial system. Penetrating this market continues to be a challenge.
The microfinance system plays an important role in incorporating first-time clients into the system. Success has been seen thus far through the development of alternate banking channels, from pharmacies to retail outlets, and the banks that will see the most success are those that are the most innovative. We see the next big jump coming from mobile banking, but it will likely be a few years before it really takes off.
Delinquency rates have risen across the financial system, but this is to be expected as the industry enters new markets where clients are a bit more of an unknown and there is more risk. However, Peruvian banks have tended to be rather conservative lenders and delinquencies remain at historically low levels.
What is the best role for foreign banks in the domestic market? How great is the need for them?
BAYLY: Foreign banks play an important role in the market. Recently, there has been an influx of foreign banks offering products and services without establishing a physical presence here, which has increased competition in the traditional banking sector. However, at the same time, we have seen the largest Peruvian companies start to look beyond traditional bank loans to raise funds, creating a greater number of opportunities for all banks in the capital markets segment.
Where foreign banks will continue to play an essential role is with satisfying niches that the local market cannot. Large-scale construction and infrastructure projects, which more often than not utilise multiple funding mechanisms, benefit from the ways that the local and foreign systems complement each other.
Peruvian banks offer flexibility in terms and conditions, but there are limits to the capital they can offer. The local capital markets system can provide long-term financing at very good rates, but it is likewise limited in size. This is a niche that is filled by international banks, which traditionally have access to more capital. This has been shown by the recent entry of the Industrial and Commercial Bank of China, which will offer Chinese companies here an invaluable means of raising capital.
Peru recently instituted reforms to its private pension funds (Administradora de Fondos de Pensiones, AFP). Will these changes be sufficient?
BAYLY: AFPs continue to be very limited, although the reforms were sorely needed and showed an important step in the right direction. However, some things still need clarification. Offering the lowest commission for a two-year period automatically guarantees “AFP-affiliate” status, but this may not achieve its designed end. Chile’s AFP system, after which Peru’s is modelled, instituted similar reforms four years ago in a bid to lower average commissions charged to affiliates, but this has yet to be attained. The pension system, like the rest of the financial sector, finds it very difficult to attract and incorporate the informal and self-employed sectors. There are two primary challenges. The first is that the market does not really respond to differences in prices. Even prior to the reforms, the difference between the highest and lowest commissions charged by AFPs was around 30%, but there has not been a mass movement from the more expensive AFPs to the cheaper ones.
The second major challenge involves the extremely high barriers to entry. At present, new affiliates must personally meet a representative of an AFP to join the system. While this works for incorporating the more affluent and profitable segments of society, it means that remote areas, where wages and returns are lower, are unattractive markets for most private AFPs. A simple way to open this market is to change the law to allow multiple, alternative channels of distribution.
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