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Banking Sector in Paraguay

Foreigners are often motivated to move to Paraguay, or apply for dual residency there, by the tax regime and low cost of living which characterise this unique Latin American country. Before doing so, it is worth checking out the state of the banking sector in Paraguay, which we will examine in closer detail in this article.

History of the banking sector in Paraguay

Paraguay’s financial system had a long history – the country’s oldest commercial bank was first established in 1920 – but didn’t undergo any major change until a period of rapid growth of the 1970s, when increases in investment and accelerated growth led to the swift monetization of the economy. Total financial activity in the country was said to have increased more than sixty times between 1960 and the mid-1980s, as national savings and the number of financial institutions soared, turning the diminutive country into a budding financial hub in the Southern Hemisphere.

But a regional recession in 1982 led to a sharp rise in bank losses, and by 1987 three major American banks – Bank of America, Chase Manhattan and the Bank of Boston – had pulled out of the country. Despite this, Paraguay’s commercial banking assets remain largely in foreign hands to this day.

Paraguay’s current financial system is made up of 390 financial institutions, including 17 licenced banks, that hold assets equivalent to 91% of the country’s GDP, and 70% for the banking sector. Three foreign and two domestically owned banks account for almost two-thirds of the banking sector assets, and are classified as systemically important. Significantly, the country’s cooperative sector represents its second largest group of financial institutions, and its three largest entities hold similar assets than some small banks. The country’s main banks include Amambay Bank, BBVA Bank, BNF Bank, Central Bank, Continental Bank, Itaú Bank and the Central Bank of Paraguay (shortened here to its Spanish-language acronym, BCP).

The COVID-19 pandemic does not appear to have had a major impact on the performance of Paraguay’s banks, which remain well capitalized and profitable according to most standard indicators. However, the stock of nonperforming, rescheduled, refinanced, and restructured loans has increased significantly, driven in large part by special repayment facilities granted to borrowers during the country’s response to the COVID-19 pandemic. As of May 2021, these “watch out” loans accounted for more than one-third of the total stock of loans, or 1.3 times banks’ equity – up from one-fifth of the total stock of loans, or 0.7 times banks’ equity, the previous year – meaning that further provisioning needs shouldn’t be totally ruled out.

Deposits make up 90% of funding of the country’s banking system, with household and corporate deposits insured up to about five times income per capita, which is in line with neighbouring countries. The steady rise in the ratio of bank deposits to GDP in recent years (from 40% in 2017 to 51% in 2020) suggests that low coverage of total deposits has not acted as an obstacle to financial deepening.

Banking in Paraguay

Paraguay’s banking system is not the strongest in Latin America, but it does have a lot to offer expat investors and dual residents. Paraguayan banks are still relatively unsophisticated, and the country has never considered itself, or been sought out as, an offshore banking center – a significant plus these days, given the proliferation of sanctions and blacklists. Since the days of the country’s volatile military dictatorship, banking has simply not developed as it has elsewhere.

Following a return to democracy in the early 1990s, Paraguay’s banking sector grew in leaps and bounds, but without the necessary regulation, oversight or training for its inexperienced and opportunistic practitioners. As a result, many national banks failed and depositors lost their savings, denting confidence in the sector and tanking demand. From 2000 onward, the country’s banking sector was consolidated in the hands of foreign organizations like Citibank, ABN-Amro, and BBVA, none of whom attempted to develop offshore banking services in the country due to political pressure back home.

Today, Paraguay continues to be a mainly cash-based economy, where most locals distrust banks. Wealthy nationals tend to store funds in Switzerland, the United States and other jurisdictions, while poor Paraguayans are simply not catered to by traditional banks, leading to a recent surge in alternative financial solutions for this demographic. The main audiences for banks in Paraguay are therefore local businesses and the country’s growing middle-class, to whom they provide a limited range of services.

This means it’s extremely difficult, and not particularly worthwhile, for a non-resident (i.e. a foreigner or offshore company) to open a bank account in Paraguay at all. Dual residents with a local cédula or ID, on the other hand, can walk into any bank and open an account without much difficulty – denominated in the local currency, the guarani, or in USD, euros and other currencies. Dual residents are advised to open an account to have local currency on hand, pay local bills and make occasional purchases. But they shouldn’t expect to rely on sophisticated wealth management solutions, at least not within the country.

Financial Inclusion

Data from the EIF (Encuesta de Inclusion Financiera) reveals that 29% of adults in Paraguay have an account at a formal financial institution, 28% use a mobile money product, and 55% use some type of financial service – including the first two options as well as credit, insurance, and other payment products. Paraguay is therefore below average for account penetration in Latin America, but is a regional leader in the expansion of mobile financial services.

Non-bank actors like cooperatives and mobile money operators have played a major role in expanding the reach of financial services in Paraguay. And other major actors – banks, cooperatives, and mobile money operators – need to work together more if real progress is to be made in expanding the availability and quality of financial services across the country.

As for the expansion of cryptocurrencies and alternative banking, adoption in Paraguay has been relatively slow so far compared to most neighbouring countries. Bitcoin trading volume is low, and few Paraguayan establishments accept crypto as a means of payment. In May 2019, the PCB issued a release reiterating that the guaraní is the country’s only official currency, and warning investors and the general public about the use of cryptocurrencies. However, the country’s unbanked population represents a huge potential market for crypto apps and exchanges, and new legislation is being proposed to govern cryptocurrency and blockchain use, which could turn Paraguay into a paradise for crypto miners.

As we have seen, the banking sector in Paraguay, although underdeveloped and unsophisticated, is appropriately suited to most residents’ needs, and could be set to expand rapidly once again with the introduction of alternative financial solutions and (potentially) cryptocurrencies. Would-be dual residents are advised to check out what banking facilities are available to them, depending on their financial situation, before making the move to this unique country. Here at Strategicasa, our dedicated and experienced team stands ready to help you with any issues you may have.