This content is from: Local Insights

Competitive advantage of savings and credit entities in El Salvador

Gustavo Vega Arrazola
Savings and Credit Entities (SCEs) are regulated financial institutions of private capital authorised to develop credit and lending activities. In El Salvador, the operation of SCEs is governed by the Law of Cooperative Banks and Savings and Credit Entities, which came into force on July 1 2001, and was amended in January 1 2009 to its current regime.

SCEs are monitored by the Superintendency of the Financial System. As regulated financial institutions, SCEs are subject to many Banking Law provisions. SCEs can be authorised to accept deposits from the public; nevertheless they can operate as SCEs without the authorisation to accept deposits, just developing lending and credit activities.

Perhaps the most important advantage of SCEs is the minimum capital requirement. The Law provides the formation of two different types of SCEs according to its purpose: non-specialised SCEs and SCEs that promote micro and small companies.

In El Salvador, banks are required to be founded and to operate with a minimum capital of $16 million, while non-specialised SCEs are required to operate with a minimum capital of $3,541,000. In addition, so as to promote investment and financial support to micro and small companies, the Law introduces a minimum capital requirement of $1,424,000 for SCEs dedicated to channel their credit and lending activities to micro and small companies.

Among other benefits, from a tax law perspective, SCEs have an exemption on Transfer of Property and Services (VAT) on the interest generated on lending operations they perform. This exemption allows SCEs to compete in the national financial market providing lower interest rates. There are two SCEs operating in El Salvador expressly authorised to raise funds and deposits from the public, developing credit activities as their core business. The outlook is uncertain, but SCEs appear to be a safe and effective source to provide micro and small companies more access to formal financial services at lower costs. On a long-term basis, small economies such as El Salvador's may overcome the effects of an economic crisis with the promotion of this type of entity.

Gustavo Vega Arrazola

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