Capital Markets and Portfolio Investment
New policies have restricted the free flow of financial resources into the product and factor markets, as well as foreign currency convertibility. Banks must now request foreign currency purchases in writing, 48 hours in advance. In an effort to shore up liquidity, banks have sharply restricted lending, increased interest rates, and implemented stricter collateral standards. The overall size and depth of the country’s financial markets and portfolio positions are very limited.
Money and Banking System
The modern banking system in Nicaragua is relatively young, small, and undercapitalized. The Central Bank of Nicaragua was established in 1961, as the state regulator of the monetary system with the sole right to issue of the national currency, the córdoba. In the 1980s, all domestic banks were nationalized and foreign banks were not permitted to accept local deposits, though they could continue to provide loans. In 1990, the National Assembly reestablished private banking in the country. During a banking crisis from 2000–2001, four banks went into bankruptcy and were dissolved.
The Superintendent of Banks and other Financial Institutions (SIBOIF) regulates banks, insurance companies, stock markets, and other financial intermediaries. SIBOIF requires that supervised entities provide audited financial statements, prepared according to international accounting standards, on a regular schedule. The Deposit Guarantee System Law (2005/551) established the Financial Institution Deposit Guarantee Fund (FOGADE) to guarantee bank deposits up to USD 10,000 per depositor, per institution. SIBOIF dependence on commercial banks limits its transparency and independence.
Although the banking system has grown and developed in the past two decades, Nicaragua remains underbanked relative to other countries in the region. Only 19 percent of Nicaraguans aged 15 or older have bank accounts, and only 8 percent have any savings in such accounts, approximately half the rate of other countries in the region, according to World Bank data. One-third of Nicaraguans continue to save their money in their home or other location while 49 percent have no savings. Nicaragua also has one of the lowest mobile banking rates in Central America.
Due to the ongoing socio-political crisis, Nicaragua’s private banks have faced many serious challenges. In an attempt to secure their liquidity, banks cut off most new lending immediately after the crisis began as banks have limited resources to cover withdrawals. Although the Nicaraguan Central Bank (BCN) supported the banks at the beginning of the crisis, since June 2018 the BCN cut financing to banks and unilaterally modified regulations governing Financial Assistance Lines (LAF), making them all but inaccessible. The reduction in lending has reduced the banks revenue, which has had a 29 percent reduction in 2018.
The banking industry remains conservative and highly concentrated, with four banks (BANPRO, Lafise, BANCENTRO, BAC, and FICOHSA) constituting 77 percent of the country’s market share. The ongoing crisis that began on April 18 sparked large withdrawals of deposits from the banking system in the following months. As of December 2018, the four banks had total assets worth USD USD 3.9 billion, a 28.3 percent drop from the 5.5 billion held in March 2018. Due to an increasingly high country risk and a relatively small business volume, the number of correspondent banking relationships with the United States has come under risk in 2018. In December, Wells Fargo Bank informed the four banks that it would withdraw from the country and would not continue to provide correspondent services. Bank of America has also withdrawn correspondent services from a local bank.
BANCORP, a subsidiary of ALBA de Nicaragua (ALBANISA), a joint venture between the State-owned oil companies of Nicaragua (49 percent) and Venezuela (51 percent) began accepting deposits in 2015. Because of its ownership structure, U.S. sanctions against the Venezuelan petroleum firm PDVSA apply to Bancorp. On March 7, 2019, in an attempt to circumvent sanctions, the National Assembly of Nicaragua approved the sale of BANCORP to the state of Nicaragua through the creation of a new National Bank, which has yet to be signed into law.
Foreigners are still allowed to open bank accounts as long as they are legal residents in the country. Due to capital flight, Central Bank data show that in 2018 the credit portfolio of Nicaraguan commercial banks fell by 14.8 percent from May to December. Loans to industry plummeted by 17.9 percent, to consumers by 18.2 percent and to the commerce sector by 15.3 percent. Despite considerable restructuring, as a result of the Establishment of Special Conditions for the Renegotiation of Debts by the SIBOIF (which expired in December 2018), non-performing loan ratios increased as a result of the economic recession. Loans in default at the end of December increased from 1 percent to 2.5 percent of total loans, while those at risk of entering default rose to 8.3 percent, up from 2.7 percent prior to the crisis.
The Foreign Investment Law allows foreign investors residing in the country to access local credit and local banks have no restriction in accepting property located abroad as collateral. However, many investors find lower cost financing and more product variety from offshore banks. Short-term government and Central Bank bonds, issued in Córdobas, dominate Nicaragua’s infant but growing capital market, and some limited stock issuances have become more prominent. Foreign banks have acquired a presence in Nicaragua through the purchase of local banks, many acting as second floor banks.
On October 3, 2018 President Ortega issued a decree that granted the UAF direct access to the private information of individuals and organizations collected by the following government institutions: Customs, the Supreme Electoral Council, Tax Authority, Social Security Institute, General Directorate for Migration and Foreigner Service, National Police, the Judiciary, and the Superintendency of Banks and Other Financial Institutions. The new regulation would give the UAF access to vital records that include salaries, travel information, police records, gun permits, vehicle registration, companies’ exports and imports, bank and insurance information, and tax payments. Further, the new regulation broadens the entities subject to UAF supervision, previously limited to financial institutions like banks and insurance companies and now including nonprofits, payment companies, car dealerships, accountants, real estate firms, jewelry stores, and fiduciary services providers. Entities under UAF supervision must comply with invasive UAF audits or face fines or the suspension of business operations. The repeated failure to provide information can result in permanent closure. With the passage of the new regulations, there will be no institutional barriers between UAF investigators and troves of personal data.
Nicaragua has not explored or announced that it intends to implement or allow the implementation of blockchain technologies in its banking transactions, though there are some consumer driven efforts to mainstream blockchain technologies.
Foreign Exchange and Remittances
Foreign Exchange Policies
Nicaragua is a highly dollarized economy. The Foreign Investment Law (2000/344) and the Banking, Nonbank Intermediary, and Financial Conglomerate Law (2005/561) allow investors to convert freely and transfer funds associated with an investment. CAFTA-DR ensures the free transfer of funds related to a covered investment. Local financial institutions freely exchange U.S. dollars and other foreign currencies. The Superintendent of Banks and other Financial Institutions (SIBOIF) monitors financial transactions for illicit activity, and the Financial Intelligence Unit (UAF) enforces anti-money laundering legislation. Transfers of funds over USD 10,000 requires additional paperwork and due diligence.
The Nicaraguan Central Bank adjusts the official exchange rate daily according to a crawling peg that devalues the Cordoba against the U.S. dollar at an annual rate of five percent. However, on August 24, the Nicaraguan Central Bank Board of Directors amended regulations to enable the Bank’s President to determine discretionarily the amount it will charge local banks for the sale of U.S. dollars, Euros and other foreign currencies. Currently, the Central Bank charges one percent higher than the official exchange rate, covering operating costs and anchoring exchange rate expectations. With the new regulation, the Central Bank’s President can charge more than the one percent, implicitly devaluing the currency as local banks would likely pass on the additional cost to consumers seeking to purchase foreign currency. It is unclear whether the revisions remain valid.
On October 19th, BCN officials notified Nicaragua’s private banks that in place of an on-line automated clearing house, banks must now request foreign currency purchases in writing, 48 hours in advance, and provide the BCN with the names of savers who want to withdraw their foreign currency deposits, as well as the amounts each individual requests. The BCN has not formally asserted the right to deny requests to purchase dollars implication.
The official exchange rate as of December 31, 2018, was 32.3 Córdobas to one U.S. dollar. The daily exchange rate can be found on the Central Bank’s website . According to the BCN, the accumulated rate of inflation for 2018 was 3.9 percent.
The Foreign Investment Law (2000/344) allows foreign investors to transfer funds abroad, whether dividends, interest or principal on private foreign debt, as well as royalties, and from compensation payments for declarations of eminent domain. Foreign investors also enjoy foreign currency convertibility through the local banking system. There are no limitations on the inflow or outflow of funds for remittances of profits or revenue.
Sovereign Wealth Funds
Nicaragua does not have a sovereign wealth fund.